Disentangling Hedging and Speculation

In this study hedge fund excess returns are decomposed into alpha and beta return components and a strong monotonic mean reversal pattern in out-of-sample performance of portfolios sorted by beta returns is documented. Two types of hedge fund managers are identified: Multi-active Managers and Risk-writing Managers. Risk-writing Managers generate returns through excessive risk taking, and exhibit the greatest total risk and beta risk among hedge fund managers. Multi-active Managers actively manage their risk factor positions that are reflective of their beliefs, continuously search for market opportunities and effectively adjust their beta positions to reflect their evolving market expectations. The superior performance of the bottom quartile beta return portfolio is mainly driven by Multi-active Managers.