Title: Trends everywhere: The case of hedge fund styles
Authors: Charles Chevalier - Universite Paris Dauphine (France) [presenting]
Serge Darolles - Paris Dauphine (France)
Abstract: The aim is to investigate empirically whether time-series momentum returns can explain the performance of hedge funds in the cross-section. Following the trend of the literature, a volatility adjusted time-series momentum signal is applied on a daily basis across a large set of futures, covering the major asset classes. We build a hierarchical set of trend factors: the full version TREND can be split in summable factors across two dimensions, the horizon of the signals and the traded asset class. We show that Managed Futures, Global Macro and Fund of Hedge Funds strategies can be partly explained by a TREND exposure, whereas Equity Market Neutral and Quantitative Directional are only exposed to long term trend factors. Moreover, a TREND exposure is a significant determinant of hedge funds returns at the aggregate level, as well as at the fund level. Finally, funds with high TREND beta outperform by 41 basis points of alpha the funds with low Trend beta. These results prove useful when managing the risk of a portfolio of hedge funds strategies, since assessment of the Trend exposure is easier. Another contribution is related to the understanding of the CTA space, composed of pure trend funds as well as funds that do not exhibit any TREND exposure.