Bear factor and hedge fund performance

Ho, T, Kagkadis, A ORCID: 0000-0002-3840-5981 and Wang, G (2025) Bear factor and hedge fund performance Journal of Empirical Finance, 82. p. 101611. ISSN 0927-5398, 1879-1727

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Abstract

We find that hedge funds that have low (negative) return covariance with the return of a bear spread portfolio (i.e., Bear factor) after controlling for the market factor, earn significantly higher returns in the cross-section. The return spread does not reflect bear risk premia; instead, it represents a low risk-high return relation. We decompose the Bear factor into different components to identify the one driving the bear beta effect on fund performance and show that the return spread can be attributed to the differential ability of low bear beta funds to reduce their market exposures when the market declines and the VIX increases (i.e., downside timing). Further analysis suggests that these fund managers are more skilled at selling overpriced insurance during volatile market periods. Overall, we propose a simple option-implied predictor of hedge fund returns and unravel a novel economic mechanism that associates the Bear factor exposure with fund performance.

Item Type:	Article
Uncontrolled Keywords:	Hedge funds, Bear factor, Bear beta, Tail risk, Downside risk
Divisions:	Faculty of Humanities & Social Sciences Faculty of Humanities & Social Sciences > School of Management
Depositing User:	Symplectic Admin
Date Deposited:	28 Mar 2025 16:18
Last Modified:	28 Feb 2026 01:19
DOI:	10.1016/j.jempfin.2025.101611
Open Access URL:	https://www.sciencedirect.com/science/article/pii/...
Related Websites:	Author Publisher
URI:	https://livrepository.liverpool.ac.uk/id/eprint/3191087
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