Series: Working Papers. 2141.
Author: Julio A. Crego and Julio Gálvez.
Topics: Financial markets | Quantitative methods | Financial risks | International Economy | Financial institutions, Banks.
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Abstract
We examine linear correlation and tail dependence between market neutral hedge funds and the market portfolio conditional on the financial cycle. We document that the low correlation between these funds and the S&P 500 consists of a negative correlation during bear periods and a positive one during bull periods. In contrast, the remaining styles present a positive correlation across cycles. We also find that these funds present tail dependence only during bull periods. We study their implications for market timing and risk management.