“Modelling and Forecasting Hedge Fund Strategy Performance during Geopolitical Instability: Insights from Indian Capital Markets”

This study examines the influence of geopolitical instability on market volatility, forecasting performance, and hedge fund strategy behaviour in Indian capital markets using a comprehensive econometric and hybrid modelling framework. The findings provide strong evidence that geopolitical risk is a significant determinant of financial market dynamics, particularly in emerging economies characterized by high sensitivity to external shocks. The empirical results confirm that increases in geopolitical risk lead to heightened market volatility and structural shifts in return behaviour. Traditional time-series models, such as ARMA–GARCH, exhibit limited predictive capability during periods of elevated geopolitical uncertainty. In contrast, models augmented with geopolitical risk indicators demonstrate improved forecasting accuracy, while hybrid models integrating econometric techniques with artificial intelligence approaches deliver the most robust performance by effectively capturing both linear and nonlinear market dynamics. The study further reveals that hedge fund strategies respond heterogeneously to geopolitical shocks. Long–short equity strategies tend to underperform during high-risk periods due to increased market instability, whereas event-driven strategies display greater adaptability and opportunity, albeit with higher risk exposure. Additionally, regime-based analysis highlights that financial markets behave differently under low and high geopolitical risk conditions, emphasizing the importance of incorporating regime sensitivity into forecasting frameworks. Overall, the study underscores the critical role of integrating geopolitical risk into financial modelling and investment strategies. It contributes to the literature by providing emerging-market evidence and highlights the growing importance of hybrid forecasting approaches. The findings offer practical implications for investors, hedge fund managers, and policymakers seeking to enhance risk management, forecasting accuracy, and strategic decision-making in increasingly uncertain global financial environments.

1.                Ang, A., Chen, J., & Xing, Y. (2006). Downside risk. The Review of Financial Studies, 19(4), 1191–1239. 2.                Engle, R. F., Ghysels, E., & Sohn, B. (2013). Stock return predictability and volatility persistence. Journal of Econometrics, 177(2), 417–428. 3.                Liu, J., Chen, Z., Yinglun, Z., Chen, Y., & Huang, Y. (2024). The time-varying effects of geopolitical risk on mutual fund risk taking. PLoS ONE, 19(6), e0303766. https://doi.org/10.1371/journal.pone.0303766 4.                Niu, Z., Wang, C., & Zhang, H. (2023). Forecasting stock market volatility with various geopolitical risk categories: New evidence from machine learning models. International Review of Financial Analysis, 89, 102738. https://doi.org/10.1016/j.irfa.2023.102738 5.                Salisu, A. A., Ogbonna, A. E., Lasisi, L., & Olaniran, A. (2025). Geopolitical risk and stock market volatility in emerging economies: Evidence from GARCH-MIDAS models. The North American Journal of Economics and Finance, 62, 101755. https://doi.org/10.1016/j.najef.2022.101755 6.                Su, C. W., Huang, S. S., & Li, Z. (2023). Forecasting EUA futures volatility with geopolitical risk: Evidence from GARCH-MIDAS models. Review of Managerial Science. https://doi.org/10.1007/s11846-023-00722-0 7.                Apergis, N., & Rezitis, A. N. (2013). Hedge fund strategies and financial stability: A GARCH analysis. Journal of International Financial Markets, Institutions & Money, 26, 124–143. 8.                Baur, D. G., & Lucey, B. M. (2010). Is gold a hedge or a safe haven? An analysis of stocks, bonds and gold. Financial Review, 45(2), 217–229. 9.                Beckmann, J., Berger, T., & Czudaj, R. (2015). Uncertainty and commodity returns: Time-frequency evidence. Journal of Banking & Finance, 61, 1–11. 10.             Bremmer, I., & Keat, P. (2009). The Fat Tail: The Power of Political Knowledge for Strategic Investing. Oxford University Press.