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Unbundling common style exposures, time variance and style timing of hedge fund beta

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Abstract

This article is concerned with the systematic exposures of equity hedge fund managers. In particular, we seek common systematic exposures of equity hedge funds through rigorous model selection techniques. We study their time variance to determine whether the style characteristics of equity hedge funds are stable over time. Most importantly, we explore the informational role of manager decisions in shifting their exposures to certain styles. Our results suggest that equity fund managers are exposed to three dominant style strategies, namely, ‘market’, ‘value’ and ‘momentum’. We also discover that there is a considerable degree of variability in the factor exposures over time for the various dominant sources of systematic risk/return. Finally, we provide evidence that managers vary their exposures to the ‘market’ in time to exploit favourable market moves. However, a similar pattern is not observed for their ‘value’ or ‘momentum’ exposures.

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Notes

  1. See www.hfr.com for more details.

  2. Details on the construction of these portfolios are available on request.

  3. This, however, does not in principle influence our analysis. In some of our model selection strategies highly correlated factors are not always jointly present in the estimated model. This allows one to distinguish among the many model specifications the marginal explanatory power of one (of the correlated) factor versus the other.

  4. The first five observations are removed from our sample owing to missing values for one of the macro factors.

  5. ‘Earnings Yield – 12-month forward’ and ‘Deviation from fair P/E’ are correlated with a correlation coefficient of 0.72.

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Acknowledgements

This research was undertaken while Spyros Mesomeris and Nima Noorizadeh were members of the Global Quantitative Research Team of Citi Investment Research in London.

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Authors and Affiliations

  1. Department of Accounting and Finance, Athens University of Economics and Business, 76 Patission Street, Athens, 10434, Greece

    Daniel Giamouridis

Authors
  1. Rodrigo Dupleich
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  2. Daniel Giamouridis
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  3. Spyros Mesomeris
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  4. Nima Noorizadeh
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Corresponding author

Correspondence to Daniel Giamouridis.

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3leads the European Quantitative Strategy team at Deutsche Bank, having joined the firm from Citi, where he spent almost 4 years researching and advising institutional clients in all aspects of the quantitative investment management process. He holds a BA and MA in Economics from Cambridge University, an MSc in Mathematical Trading and Finance from Cass Business School, and a PhD in Financial Economics also from Cass. His academic research has been published in various academic journals, including the Journal of International Money and Finance.

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Dupleich, R., Giamouridis, D., Mesomeris, S. et al. Unbundling common style exposures, time variance and style timing of hedge fund beta. J Asset Manag 11, 19–30 (2010). https://doi.org/10.1057/jam.2010.2

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  • DOI: https://doi.org/10.1057/jam.2010.2

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