Short-Put Exposures in Hedge Fund Returns: Are They Really There?
28 Pages Posted: 16 Feb 2009
Date Written: February 13, 2009
Abstract
Previous studies have shown that systematic risk in hedge fund returns is partly captured by short positions in put option returns. This is suggestive of a potential 'peso problem' in hedge fund returns: a series of steady returns may alternate with an occasional crash. In this paper, we analyze whether equity option-exposures are actually there, and find they are not. Although some hedge fund indices show some exposure to put or call-returns, several robustness analysis as well as an analysis of individual hedge fund returns show that exposures are not consistent with fundamental characteristics of options, such as put-call parity and the positive relation between option prices and volatility.
Keywords: hedge funds, nonlinear systematic risk factors, option factors, stability
JEL Classification: G12, G23
Suggested Citation: Suggested Citation
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