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Monetary Policy after the Crisis: Threat or Opportunity to Hedge Funds' Alphas?

    Research output: Contribution to journal › Article (Academic Journal) › peer-review

    Abstract

    We examine the effects of U.S. monetary policy announcements during and after the Great Financial Crisis on the average abnormal returns (the “alpha”) of the hedge fund industry as a whole and of a range of hedge strategy indices. We apply a variety of tests of increasing sophistication including simple event studies, formal tests for breaks, and Markov switching models. The event studies show that both the overall index and longshort equity and fixed income arbitrage hedge strategies were systematically affected by unexpected monetary policy announcements while other strategies appear to have been less impacted. Formal break point tests show that for all but one strategies as well as the overall index, there is evidence of five breakpoints. For the overall index and most of the sub-indices many of the endogenously determined breaks closely match a list of policy surprise dates that have been already singled out because they had strongly affected financial markets in general. Especially for the long-short equity, fixed income arbitrage, dedicated short-bias, and global macro hedge funds, there is a significant tendency for estimated alphas decline over time, following policy surprises.
    Original languageEnglish
    JournalJournal of Asset Management
    Publication statusPublished - 2020

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