Tail risk and hedge fund returns

This paper by academics at Erasmus University and the University of Chicago shows that hedge funds exhibit persistent exposures to extreme downside risk, and that tail risk is an important determinant of the time-series and cross-section variation of hedge fund returns. Further it concludes that these results are consistent with the notion that a significant component of hedge fund returns can be viewed as compensation for providing insurance against tail risk.

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Tail risk and hedge fund returns