The q-factor model and the redundancy of the value factor: An application to hedge funds

François-Éric Racicot () and Raymond Théoret
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Raymond Théoret: Telfer School of Management, University of Ottawa

Journal of Asset Management, 2016, vol. 17, issue 7, No 4, 526-539

Abstract: Abstract We test the new Fama and French five-factor model on a sample of hedge fund strategies. This model embeds the q-factor asset pricing model which lies on the CMA and RMW factors. We find that the HML factor is not redundant for many strategies, as conjectured by Fama and French in their setting. HML seems to embed risk dimensions which are not included in the Fama and French new factors. In contrast to Fama and French, the α puzzle is robust to the addition of CMA and RMW. Furthermore, hedge funds seem to prefer, on the one hand, firms which invest a lot to firms which invest less, and, on the other hand, weak firms over robust ones. Finally, our results are not sensitive to the addition of the Fung and Hsieh seven-factor model. However, the explanatory power of the eleven-factor model is much higher for some hedge fund strategies involved in arbitrage.

Keywords: hedge fund; q-factor model; ICAPM; return smoothing; five-factor model; lookback straddle (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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DOI: 10.1057/jam.2016.22

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