Alternative Investments – CAIA Level I : [PDF Download]

PDF Title:Alternative Investments
Author:Donald R. Chambers, Mark J.P. Anson, Keith H. Black & Hossein Kazemi
Total Page:957 Pages
PDF Size:5.24 MB
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“Beta nonstationarity is one reason why return can be attributed to systematic risk with error. Beta nonstationarity is a general term that refers to the tendency of the systematic risk of a security, strategy, or fund to shift through time.

For example, a return series containing leverage is generally expected to have a changing systematic risk through time if the leverage changes through time. An example is the stock of a corporation with a fixed dollar amount of debt. As the assets of the firm rise, the leverage of the equity falls (or if the assets fall, leverage of the equity rises), causing the beta of the equity to shift.

A type of beta nonstationarity that is sometimes observed in hedge funds is beta creep. Beta creep is when hedge fund strategies pick up more systematic market risk over time.

When assets pour into hedge funds, it might be expected that the managers of the funds will allow more beta exposure in their portfolios in an attempt to maintain expected returns in an increasingly competitive and crowded financial market.

This causes the creeping effect: that over time, as more funds flow to hedge fund managers, the amount of systematic risk in their portfolios will creep upward.”

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