Publication Type
Journal Article
Version
publishedVersion
Publication Date
7-2018
Abstract
We find hedge funds that have higher return covariation with a disaster concern index, which we develop through out-of-the-money puts on various economic sector indices, earn significantly higher returns in the cross-section. We provide evidence that these funds’ managers are more skilled at exploiting the market’s ex ante rare disaster concerns (SEDs), which may not be associated with disaster risk. In particular, high-SED funds, on average, outperform low-SED funds by 0.96% per month, but have less exposure to disaster risk. They continue to deliver superior future performance when SEDs are estimated using the disaster concern index purged of disaster risk premiums and have leverage-managing and extreme market-timing abilities.
Keywords
rare disaster concern, hedge fund, skill
Discipline
Finance | Finance and Financial Management
Research Areas
Finance
Areas of Excellence
Growth in Asia
Publication
Review of Financial Studies
Volume
31
Issue
7
First Page
2650
Last Page
2692
ISSN
0893-9454
Identifier
10.1093/rfs/hhy027
Publisher
Oxford University Press
Citation
GAO, George P.; GAO, Pengjie; and SONG, Zhaogang.
Do hedge funds exploit rare disaster concerns?. (2018). Review of Financial Studies. 31, (7), 2650-2692.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/7922
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
External URL
https://api.elsevier.com/content/abstract/scopus_id/85056239892
Additional URL
https://doi.org/10.1093/rfs/hhy027