A1718
Title: On hedge funds: New evidence from volatility risk premia embedded in VIX options
Authors: Anmar Al Wakil - Paris-Dauphine University (France) [presenting]
Serge Darolles - Paris Dauphine (France)
Abstract: Volatility risk in hedge funds is deciphered from option-based dynamic trading strategies. It is demonstrated that volatility risk premia strategies, as measured by pricing discrepancies between real-world and risk-neutral probability distributions of the volatility of the S\&P 500 Index returns embedded in VIX options, are instrumental determinants in hedge fund performance, in both time-series and cross-section. After controlling for Fung-Hsieh factors, a positive one-standard deviation shock to volatility of volatility risk premium is associated with a substantial decline in aggregate hedge fund returns of 25.2\% annually. The results particularly evidence hedge funds that significantly load on volatility of volatility (kurtosis of volatility) risk premium subsequently outperform low-beta funds by nearly 11.7\% (8.6\%) per year. This finding suggests to what extent hedge fund alpha arises actually from selling volatility risk.
