The concept of uncertainty in investment returns, as an additional consideration to the traditional mean-variance framework, is receiving increased attention in the finance literature. This article examines the financial market relationship between uncertainty and hedge fund returns, finding that a readily available proxy for uncertainty (the CBOE® VVIX index) is a useful indicator of next-month hedge fund returns. Hedge funds in the highest quintile of VVIX index sensitivity outperform those in the lowest quintile of uncertainty by 5.97% annually, on average. The results of the study indicate that the use of this parsimonious measure of uncertainty compares favorably to more complex measures of uncertainty that have previously been analyzed.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics