Regression Results for the Entire Barclay Hedge Universe

by Graham Giller January 26, 2009 16:08
I knuckled down and did the regressions for every sub-index tracked by Barclay (now known as Barclay Hedge). You can find the raw data published on their website here.

Firstly, here is a chart of the cumulative returns for all of the indices.

This was prepared from the data that Barclay Hedge make available on their website.

The following table

shows the results of all of these regressions. The method is a simple linear regression onto the VIX-GARCH variance spread.

The table shows a range of responses, and some fairly high (as much as 37%) R-Squareds as well as some fairly low ones. The largest R-Squared is for Convertible Aribitrage, which is not surprising as this is most purely a delta-hedging strategy and so should correlate very strongly with the available risk premium expressed via the VIX-GARCH spread.

However, I'm quite suprised that Distressed Securities is the investment style with the second strongest regression. Perhaps this indicates that DS traders are implementing their strategies via options or perhaps it indicates that distressed securities could be thought of as binary call options on the profitability of a company.

The third strongest is Fixed Income Arbitrage which is, I'm hypothesising, not actually "Arbitrage" but dominated by convexity spread plays. In this scenario, it would also be a fairly pure delta hedging strategy -- If so this might indicate that the profitability of interest rate option trading and that of equity option trading are closely linked; which is the kind of hypothesis we originally advocated in our original post.

Of course, the observable similarity of the returns in these series is crying out for the establishment of a proper factor model, which we will examine in the next post.  

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About the Author

Graham Giller - Headshot GRAHAM GILLER
Dr. Giller holds a doctorate from Oxford University in experimental elementary particle physics. His field of research was statistical astronomy using high energy cosmic rays. After leaving Oxford, he worked in the Process Driven Trading Group at Morgan Stanley, as a strategy researcher and portfolio manager. He then ran a CTA/CPO firm which concentrated on trading eurodollar futures using statistical models. From 2004, he has managed a private family investment office. In 2009, he joined a California based hedge fund startup, concentrating on high frequency alpha and volatility forecasting. My updated resume is on LinkedIn.

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