Do Hedge Funds Hedge Analysis

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datenum
9/30/2000
8/31/2000
7/31/2000
6/30/2000
5/31/2000
4/30/2000
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2/29/2000
1/31/2000
12/31/1999
11/30/1999
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9/30/1999
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6/30/1999
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4/30/1999
3/31/1999
2/28/1999
1/31/1999
12/31/1998
11/30/1998
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6/30/1998
5/31/1998
4/30/1998
3/31/1998
2/28/1998
1/31/1998
12/31/1997
11/30/1997
10/31/1997
9/30/1997
8/31/1997
7/31/1997
6/30/1997
5/31/1997
4/30/1997
3/31/1997
2/28/1997
1/31/1997
12/31/1996
datetext
09/2000
08/2000
07/2000
06/2000
05/2000
04/2000
03/2000
02/2000
01/2000
12/1999
11/1999
10/1999
09/1999
08/1999
07/1999
06/1999
05/1999
04/1999
03/1999
02/1999
01/1999
12/1998
11/1998
10/1998
09/1998
08/1998
07/1998
06/1998
05/1998
04/1998
03/1998
02/1998
01/1998
12/1997
11/1997
10/1997
09/1997
08/1997
07/1997
06/1997
05/1997
04/1997
03/1997
02/1997
01/1997
12/1996
sp_tr
riskfree
-5.30% 0.50%
6.19% 0.51%
-1.58% 0.49%
2.45% 0.48%
-2.07% 0.49%
-3.03% 0.47%
9.77% 0.48%
-1.91% 0.46%
-5.04% 0.44%
5.87% 0.44%
2.02% 0.42%
6.31% 0.40%
-2.76% 0.39%
-0.51% 0.40%
-3.14% 0.38%
5.53% 0.38%
-2.38% 0.38%
3.86% 0.36%
3.98% 0.37%
-3.12% 0.37%
4.16% 0.36%
5.75% 0.37%
6.04% 0.37%
8.12% 0.34%
6.39% 0.40%
-14.47% 0.41%
-1.08% 0.41%
4.05% 0.42%
-1.74% 0.42%
0.99% 0.42%
5.10% 0.42%
7.20% 0.43%
1.09% 0.42%
1.70% 0.43%
4.61% 0.43%
-3.36% 0.41%
5.46% 0.41%
-5.62% 0.43%
7.94% 0.42%
4.46% 0.41%
6.07% 0.43%
5.95% 0.43%
-4.13% 0.43%
0.77% 0.42%
6.23% 0.42%
-2.00% 0.41%
hedge
-0.41%
3.39%
0.11%
3.66%
-1.17%
-4.63%
-2.12%
6.49%
-0.10%
8.53%
4.96%
2.37%
-0.32%
-0.90%
0.26%
3.28%
0.13%
2.63%
1.22%
-1.31%
0.80%
3.03%
1.36%
-4.57%
-2.31%
-7.55%
0.90%
1.59%
0.26%
0.95%
5.94%
1.96%
-1.21%
3.22%
1.00%
-1.64%
3.99%
-1.26%
6.99%
2.26%
0.88%
2.86%
-1.41%
1.30%
5.48%
0.31%
exhedge
-0.91%
2.88%
-0.38%
3.18%
-1.66%
-5.10%
-2.60%
6.03%
-0.54%
8.09%
4.54%
1.97%
-0.71%
-1.30%
-0.12%
2.90%
-0.25%
2.27%
0.85%
-1.68%
0.44%
2.66%
0.99%
-4.91%
-2.71%
-7.96%
0.49%
1.17%
-0.16%
0.53%
5.52%
1.53%
-1.63%
2.79%
0.57%
-2.05%
3.58%
-1.69%
6.57%
1.85%
0.45%
2.43%
-1.84%
0.88%
5.06%
-0.10%
exsptr
-5.80%
5.69%
-2.07%
1.97%
-2.56%
-3.50%
9.29%
-2.37%
-5.49%
5.44%
1.59%
5.91%
-3.15%
-0.91%
-3.52%
5.15%
-2.75%
3.50%
3.61%
-3.50%
3.80%
5.38%
5.67%
7.78%
5.99%
-14.89%
-1.50%
3.63%
-2.15%
0.57%
4.69%
6.77%
0.67%
1.27%
4.18%
-3.77%
5.05%
-6.05%
7.52%
4.05%
5.64%
5.52%
-4.55%
0.35%
5.81%
-2.40%
exsptr1
5.69%
-2.07%
1.97%
-2.56%
-3.50%
9.29%
-2.37%
-5.49%
5.44%
1.59%
5.91%
-3.15%
-0.91%
-3.52%
5.15%
-2.75%
3.50%
3.61%
-3.50%
3.80%
5.38%
5.67%
7.78%
5.99%
-14.89%
-1.50%
3.63%
-2.15%
0.57%
4.69%
6.77%
0.67%
1.27%
4.18%
-3.77%
5.05%
-6.05%
7.52%
4.05%
5.64%
5.52%
-4.55%
0.35%
5.81%
-2.40%
7.12%
exsptr2
-2.07%
1.97%
-2.56%
-3.50%
9.29%
-2.37%
-5.49%
5.44%
1.59%
5.91%
-3.15%
-0.91%
-3.52%
5.15%
-2.75%
3.50%
3.61%
-3.50%
3.80%
5.38%
5.67%
7.78%
5.99%
-14.89%
-1.50%
3.63%
-2.15%
0.57%
4.69%
6.77%
0.67%
1.27%
4.18%
-3.77%
5.05%
-6.05%
7.52%
4.05%
5.64%
5.52%
-4.55%
0.35%
5.81%
-2.40%
7.12%
2.32%
11/30/1996
10/31/1996
9/30/1996
8/31/1996
7/31/1996
6/30/1996
5/31/1996
4/30/1996
3/31/1996
2/29/1996
1/31/1996
12/31/1995
11/30/1995
10/31/1995
9/30/1995
8/31/1995
7/31/1995
6/30/1995
5/31/1995
4/30/1995
3/31/1995
2/28/1995
1/31/1995
12/31/1994
11/30/1994
10/31/1994
9/30/1994
8/31/1994
7/31/1994
6/30/1994
5/31/1994
4/30/1994
3/31/1994
2/28/1994
1/31/1994
11/1996
10/1996
09/1996
08/1996
07/1996
06/1996
05/1996
04/1996
03/1996
02/1996
01/1996
12/1995
11/1995
10/1995
09/1995
08/1995
07/1995
06/1995
05/1995
04/1995
03/1995
02/1995
01/1995
12/1994
11/1994
10/1994
09/1994
08/1994
07/1994
06/1994
05/1994
04/1994
03/1994
02/1994
01/1994
7.54%
2.74%
5.61%
2.09%
-4.43%
0.36%
2.56%
1.46%
0.95%
0.91%
3.39%
1.91%
4.37%
-0.37%
4.20%
0.23%
3.30%
2.31%
3.98%
2.93%
2.93%
3.88%
2.58%
1.47%
-3.66%
2.23%
-2.46%
4.08%
3.27%
-2.47%
1.62%
1.27%
-4.38%
-2.73%
3.38%
0.42%
0.42%
0.43%
0.42%
0.43%
0.43%
0.42%
0.42%
0.41%
0.41%
0.42%
0.43%
0.45%
0.44%
0.44%
0.45%
0.46%
0.46%
0.47%
0.47%
0.48%
0.48%
0.48%
0.47%
0.44%
0.41%
0.39%
0.37%
0.36%
0.35%
0.35%
0.31%
0.29%
0.27%
0.25%
5.04%
3.35%
2.50%
2.48%
-4.13%
1.74%
1.93%
3.12%
1.06%
-3.59%
6.97%
3.06%
3.14%
-0.11%
0.38%
6.00%
2.76%
0.37%
1.01%
1.45%
3.48%
0.45%
-1.97%
-0.21%
0.41%
-1.35%
0.67%
2.77%
0.35%
-0.81%
2.23%
-1.74%
-3.57%
-4.09%
1.14%
4.62%
2.93%
2.07%
2.06%
-4.56%
1.31%
1.51%
2.70%
0.65%
-4.00%
6.55%
2.63%
2.69%
-0.55%
-0.06%
5.55%
2.30%
-0.09%
0.54%
0.98%
3.00%
-0.03%
-2.45%
-0.68%
-0.03%
-1.76%
0.28%
2.40%
-0.01%
-1.16%
1.88%
-2.05%
-3.86%
-4.36%
0.89%
7.12%
2.32%
5.18%
1.67%
-4.87%
-0.06%
2.14%
1.04%
0.53%
0.50%
2.97%
1.48%
3.93%
-0.82%
3.76%
-0.22%
2.84%
1.85%
3.51%
2.46%
2.46%
3.40%
2.09%
1.00%
-4.10%
1.82%
-2.85%
3.71%
2.90%
-2.82%
1.28%
0.96%
-4.67%
-3.00%
3.13%
2.32%
5.18%
1.67%
-4.87%
-0.06%
2.14%
1.04%
0.53%
0.50%
2.97%
1.48%
3.93%
-0.82%
3.76%
-0.22%
2.84%
1.85%
3.51%
2.46%
2.46%
3.40%
2.09%
1.00%
-4.10%
1.82%
-2.85%
3.71%
2.90%
-2.82%
1.28%
0.96%
-4.67%
-3.00%
3.13%
0.94%
5.18%
1.67%
-4.87%
-0.06%
2.14%
1.04%
0.53%
0.50%
2.97%
1.48%
3.93%
-0.82%
3.76%
-0.22%
2.84%
1.85%
3.51%
2.46%
2.46%
3.40%
2.09%
1.00%
-4.10%
1.82%
-2.85%
3.71%
2.90%
-2.82%
1.28%
0.96%
-4.67%
-3.00%
3.13%
0.94%
-1.23%
exsptr3
1.97%
-2.56%
-3.50%
9.29%
-2.37%
-5.49%
5.44%
1.59%
5.91%
-3.15%
-0.91%
-3.52%
5.15%
-2.75%
3.50%
3.61%
-3.50%
3.80%
5.38%
5.67%
7.78%
5.99%
-14.89%
-1.50%
3.63%
-2.15%
0.57%
4.69%
6.77%
0.67%
1.27%
4.18%
-3.77%
5.05%
-6.05%
7.52%
4.05%
5.64%
5.52%
-4.55%
0.35%
5.81%
-2.40%
7.12%
2.32%
5.18%
1.67%
-4.87%
-0.06%
2.14%
1.04%
0.53%
0.50%
2.97%
1.48%
3.93%
-0.82%
3.76%
-0.22%
2.84%
1.85%
3.51%
2.46%
2.46%
3.40%
2.09%
1.00%
-4.10%
1.82%
-2.85%
3.71%
2.90%
-2.82%
1.28%
0.96%
-4.67%
-3.00%
3.13%
0.94%
-1.23%
1.80%
b) [6 points] Devise a naming scheme for eight more variables. These will be for two groups of
interactions. The first group will be four interaction variables for up markets. For the first
variable in this group, multiply the contemporaneous excess market return (exsptr) times the
up-market indicator for the contemporaneous month. For the next variable in this group,
multiply the first lag excess market return (exsptrl) times the up-market indicator for the first
lag. For the next variable, multiply the second lag excess market return (exsptr2) times the
up-market indicator for the second lag. Follow the same process for the remaining up market
variable.
Follow a similar process for the down-market interaction variables. For the first variable in
this group, multiply the contemporaneous excess market return (exsptr) times the down-
market indicator for the contemporaneous month. For the next variable in this group,
multiply the first lag excess market return (exsptr1) times the down-market indicator for the
first lag. Create the remaining two variables similarly.
These eight new variables should now be populated with a mix of zeros and return values.
Only positive return values (along with the zeros) should appear in the up-market interaction
variables. Only negative return numbers (along with the zeros) should appear in the down-
market interaction variables. For credit for this question part, summarize, describe, inspect,
view or otherwise show that you have created these data. As a quantitative reference point,
what is the value for September 2000 (top of the list) of the third lag for down markets – a 0
or a negative return value?
c) [6 points] Run a regression (robust) of the excess hedge fund returns (exhedge) on the eight
interaction terms that you created. In addition to supplying your regression output, list the
six numeric values of the items below for grader review. Also answer this question: Do your
results essentially match those of the top row of exhibit 5 of page 14 (pdf page 9 of the
article?
Up Markets
Contemp. Beta
Sum of lag 1, lag 2 and lag 3 betas
Sum of all four betas
Down Markets
Contemp. Beta
Sum of lag 1, lag 2 and lag 3 betas
Sum of all four betas
d) [6 points] Examine the confidence intervals calculated by the software for the two
contemporaneous betas. Do the confidence intervals overlap? Using that information, and
making an educated guess about the summed betas for up markets and for down markets,
does it seem as though the hedge fund managers might be employing a different asset pricing
style in up markets versus down markets?
e) [6 points] Submit a PDF file, or similar Gradescope-acceptable format, copy of your code.
Problem 3 [30 points) In the questions below, you will be asked to further investigate the hedge
fund return dataset that you used in the previous two problem sets. Again you are asked for two
deliverables. The first deliverable will be your answer sheet with verbal answers to some
question parts and copies of the relevant portion of your Stata or R command and results in other
question parts. The second deliverable will be a PDF copy (or legibly clear pictures if need be)
of the door.R file that you create. You may choose to clean up this .do or.R file before
submitting the PDF copy of it, but you should ensure that what you submit, and save, actually
executes properly.
As a reminder, the authors of Do Hedge Funds Hedge? are exploring the notion that hedge fund
managers price their securities in a way that makes their risk appear lower than the true riskiness.
Because managers may have some pricing flexibility, perhaps they price differently when the
than when the market goes down. You will “divide” the data into observations
when the excess S&P return is positive, up markets, and when it is negative, down markets, and
calculate the beta for each group.
a) [6 points] Start with the data supplied with this problem set, which reflects the work through
problem set 3. The goal of this step is to create eight new indicator variables. Devise a
naming scheme such that each variable name reflects two pieces of information, 1) whether it
relates to up markets or down markets, and 2) whether it is for the contemporaneous month,
one month prior, two months prior or three months prior. Thus, there will be four new
variables relating to up markets (contemporaneous, 1 lag, 2 lag, 3 lag) and four relating to
down markets.
The data names of the contemporaneous and lagged excess market returns in the supplied
dataset are,
market goes
exsptr
exsptr 1
exsptr2
exsptr3
For the first of the eight variables that you create, focus on the contemporaneous excess
market return. Using some type of an “if’ statement in your code, value the new variable as
“1” if the excess market return (exsptr) is positive, and as a “O” if it is zero or negative. For
the second new variable that you create, focus on the first lagged excess market return
(exsptrl). Value the new variable as 1 if the lagged excess market return is positive, and 0 if
it is zero or negative. Create the next two variables similarly, focusing on the next two lags
of the excess market return.
The other four new variables must be populated with the opposite coding. In other words,
these variables are valued as 1 if the excess market had a return of zero or was down during
the month. They are coded as 0 if the market had a positive excess return. These are the
indicators for a down market.
For credit for this question part, summarize, describe, inspect, view or otherwise show that
you have created these data. As a quantitative reference point, what is the value for
September 2000 (top of the list) of the third lag for down markets – a 0 or a 1?

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Market Return

Monthly Returns

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