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Hedge Fund Return Correlation Under Extreme Market Condition, Melvyn Teo
Hedge Fund Return Correlation Under Extreme Market Condition, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
How dependent are returns across hedge fund investment strategies? We estimate the probability that each investment strategy performs poorly when other investment strategies are delivering extreme negative returns. Under extreme market conditions, we find that event driven, distressed debt, and equity long/short funds exhibit the highest correlation with other styles while commodity trading advisors, macro, and equity market neutral funds exhibit the lowest correlation. In addition, we show that Asia-focused event driven and equity market neutral funds provide diversification for investors holding US- and Europe-focused funds.