A Time to Scatter Stones, and a Time to Gather Them: The Annual Cycle in Hedge Fund Risk Taking
The Financial Review, Forthcoming
71 Pages Posted: 19 Jul 2013 Last revised: 30 Jan 2018
Date Written: November 28, 2017
Abstract
Analyzing a novel sample of hedge fund daily returns from Bloomberg, we show a seasonal pattern in their risk taking. During earlier months of a year, poorly performing funds reduce their risk. The reduction is stronger for funds with higher management fees, shorter redemption periods, and recently deteriorating performance, consistent with a managerial aversion to early fund liquidation. Towards the end of a year, all poorly performing funds gamble for resurrection by increasing risk. The risk increase can be linked to indirect managerial incentives, which become stronger during the second half of a year, and it is largely achieved by increasing exposure to market factors.
Keywords: Hedge funds, risk taking, incentives, seasonality
JEL Classification: G23
Suggested Citation: Suggested Citation