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

See all articles by Olga Kolokolova

Olga Kolokolova

Lancaster University Management School

Achim Mattes

University of Konstanz

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

Kolokolova, Olga and Mattes, Achim, A Time to Scatter Stones, and a Time to Gather Them: The Annual Cycle in Hedge Fund Risk Taking (November 28, 2017). The Financial Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2294929 or http://dx.doi.org/10.2139/ssrn.2294929

Olga Kolokolova (Contact Author)

Lancaster University Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Achim Mattes

University of Konstanz ( email )

Universitaetsstrasse 10
Konstanz, D-78457
Germany

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