Risk Analysis Of Hedge Funds: A Markov Switching Model Analysis

Abstract

The paper applies Markov Regime Switching GARCH Model (SW-GARCH) to investigate the volatility behavior of strategies hedge fund monthly returns for the period 1997-2011. The results highlight two different regimes: The first regime is characterized by a high volatility for all strategies hedge fund monthly returns. The second is characterised by lower volatility and positive average returns (except Emerging Market strategy). Our results helped to capture even the short-lived crises along with the material crises of 2001 and 2008.