Special to AllAboutAlpha.com by: Mikhail Munenzon, CFA, CAIA

There is a common belief among many that hedge funds thrive in times of market chaos. Hedge funds provide the market with much needed liquidity during times of crisis. Whether you call this market making, or contrarian investing, hedge funds have the flexibility to trade with desperate sellers (“fear”) on one day and desperate buyers (“greed”) the next – making them a useful balancing mechanism in financial markets.

But some types of hedge funds clearly benefit from market volatility while others don’t. In today’s installment of our “Alternative Viewpoints” column by a member of the CAIA Association, we feature an interesting study by Mikhail Munenzon of the relationship between the VIX and hedge fund returns. What you are about to read may surprise you or it may confirm your intuition. But regardless, it will likely help to clarify your understanding of the relationship between the volatility and hedge fund returns.

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