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The Journal of Alternative Investments

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Dedicated Short Bias Hedge Funds: Diversification and Alpha during Financial Crises

Ciara Connolly and Mark C. Hutchinson
The Journal of Alternative Investments Winter 2012, 14 (3) 28-41; DOI: https://doi.org/10.3905/jai.2012.14.3.028
Ciara Connolly
is an analyst in the Investment Selection team at Davy Private Clients in Cork, Ireland.
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Mark C. Hutchinson
is a lecturer in the Department of Accounting, Finance, and Information Systems and the co-director of the Centre for Investment Research at the University College Cork in Cork, Ireland.
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  • For correspondence: m.hutchinson@ucc.ie
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Abstract

During the recent financial crisis dedicated short bias (DSB) hedge funds exhibited extremely strong results while many other hedge fund strategies suffered badly. This article, prompted by this recent episode, investigates DSB hedge fund performance over an extended sample period, from January 1994 to December 2008. Performance and risk evaluation are carried out on an equally weighted DSB hedge fund portfolio using three different factor model specifications and both linear and nonlinear estimation techniques. The authors conclude that DSB hedge funds are a significant source of diversification for equity market investors and produce statistically significant levels of alpha. Their findings are robust to the specification of traditional and alternative risk factors, nonlinearity, and the omission of the crisis periods, which are particularly favorable for the DSB strategy.

TOPICS: Real assets/alternative investments/private equity, options, financial crises and financial market history, statistical methods

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The Journal of Alternative Investments: 14 (3)
The Journal of Alternative Investments
Vol. 14, Issue 3
Winter 2012
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Dedicated Short Bias Hedge Funds: Diversification and Alpha during Financial Crises
Ciara Connolly, Mark C. Hutchinson
The Journal of Alternative Investments Dec 2011, 14 (3) 28-41; DOI: 10.3905/jai.2012.14.3.028

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Dedicated Short Bias Hedge Funds: Diversification and Alpha during Financial Crises
Ciara Connolly, Mark C. Hutchinson
The Journal of Alternative Investments Dec 2011, 14 (3) 28-41; DOI: 10.3905/jai.2012.14.3.028
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  • Article
    • Abstract
    • DATA
    • PERFORMANCE OF DSB HEDGE FUNDS
    • DIVERSIFICATION BENEFITS OF DSB HEDGE FUNDS
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
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