Generalised style analysis of hedge funds

V Agarwal () and N Y Naik
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V Agarwal: London Business School
N Y Naik: Associate Professor of Finance and Citibank Research Fellow at the London Business School

Journal of Asset Management, 2000, vol. 1, issue 1, No 7, 93-109

Abstract: Abstract This paper attempts to shed light on the ‘black box’ called hedge funds via the style analysis technique developed by Sharpe (1992). The conventional style analysis cannot be directly applied to hedge funds as it imposes two constraints: first, the style weights have to be non-negative, and secondly, they have to add up to 100 per cent. In addition, the conventional style analysis does not provide any information about the statistical significance of the style weights. In this paper, we conduct a generalised style analysis of various hedge fund strategies by relaxing the constraints of the conventional style analysis, and examine the significance of style weights, as in Lobosco and DiBartolomeo (1997). We find that the generalised style analysis approach is more robust for estimating the risk exposures of hedge funds that take short positions in various asset classes and typically hold a significant part of their portfolio in cash.

Keywords: hedge funds; risk-return tradeoffs; style analysis; significant risk exposures (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1057/palgrave.jam.2240007

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