The performance of hedge funds in different VIX “states”
| Jun 20th, 2010 | Filed under: CAIA Alternative Viewpoints Columns, Performance, Analytics & Metrics, Today's Post | By: Guest |
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There is a common belief among many that hedge funds thrive in times of market chaos. Hedge funds provide the market with much needed liquidity during times of crisis. Whether you call this market making, or contrarian investing, hedge funds have the flexibility to trade with desperate sellers (“fear”) on one day and desperate buyers (“greed”) the next – making them a useful balancing mechanism in financial markets.
But some types of hedge funds clearly benefit from market volatility while others don’t. In today’s installment of our “Alternative Viewpoints” column by a member of the CAIA Association, we feature an interesting study by Mikhail Munenzon of the relationship between the VIX and hedge fund returns. What you are about to read may surprise you or it may confirm your intuition. But regardless, it will likely help to clarify your understanding of the relationship between the volatility and hedge fund returns.
Special to AllAboutAlpha.com by: Mikhail Munenzon, CFA, CAIA
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Regarding the VIX returns represented in Table 1, I do not see how you came up with the VIX returns with VIX >40. I did the same exercise, and while my arithmetic mean for the entire period came out almost identical, I found that the VIX arithmetic mean return when VIX began the period at 40 or above was -10%. I used both calendar months – of which there were only 8 when VIX began the period >=40 – and daily data, where I used 22 trading days as a month (yes..oversampling the data, but was curious to see what it would show.) Both methods showed an arithmetic mean return of about -10%.
Again, I used the VIX starting figure as the ’state’ variable, as I don’t believe the VIX ending figure would be useful because of lookback issues. Can you please explain how you calculated the VIX returns, and in turn, if there are any knock on effects as to how the returns for the strategies were calculated. Thank you. CF