Nonlinear hedge fund index clones?

Mikhail Walden and Paul Lajbcygier
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Mikhail Walden: SuperEd, Melbourne, VIC, Australia; Monash Business School, Monash University, Australia
Paul Lajbcygier: Monash Business School, Monash University, Clayton, VIC, Australia

Australian Journal of Management, 2023, vol. 48, issue 1, 147-170

Abstract: Cloning hedge fund indexes circumvents the many challenges associated with direct hedge fund investment. Theoretically, hedge fund indexes could have nonlinear exposures to the economic risk factors that drive their returns and may require nonlinear clones. By using flexible statistical models, we enable the choice between linear and nonlinear clones. We demonstrate that for certain hedge fund styles, nonlinear index clones are crucial for high fidelity replication. Nonlinear clones both facilitate economic insights to cloning and enhance the best linear clones. JEL classification: G10, G23, C15

Keywords: Generalized additive models; hedge funds; investments; nonlinearities (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:48:y:2023:i:1:p:147-170

DOI: 10.1177/03128962221102184

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