A Conditional Volatility Feedback Moderation Modeling to the Market Timing Behavior Per Hedge Funds’ Investment Styles

A direct effect on the current performance of certain hedge fund investment styles by the one-month prior return of primitive trend following strategy on the short-term interest rate (PTFSIR) depends quadratically on the size of the returns of the one-month prior implied volatility index (“VIX”) as a primary moderator. To investigates empirically whether the past return of implied volatility information can explain the dynamic factor exposures of hedge funds over time, this manuscript advances the quantitative behavioral science literature for making inferences about the conditional process model with a quadratic moderator. Consistent with our view that hedge funds exhibit different levels of skills in exploiting the information contents of equity implied volatilities, we document substantial heterogeneity of processing one-month prior quadratic volatility returns by altering their risky asset exposures across hedge fund investment styles. We subsequently apply the same analytical framework to three different collections of individual liquid alternative hedge funds to test if the PTFSIR factor’s effect on hedge fund strategy returns is linearly moderated by one-month prior return volatilities of the VIX and the corresponding hedge funds’ dynamic risky asset and factor exposure management implications.