Assessing and valuing the nonlinear structure of hedge fund returns

Antonio Diez de los Rios and René Garcia

Journal of Applied Econometrics, 2011, vol. 26, issue 2, 193-212

Abstract: Several studies have put forward that hedge fund returns exhibit a nonlinear relationship with equity market returns, captured either through constructed portfolios of traded options or piece-wise linear regressions. This paper provides a statistical methodology to unveil such nonlinear features with respect to returns on benchmark risk portfolios. We estimate a portfolio of options that best approximates the returns of a given hedge fund, account for this search in the statistical testing of the nonlinearity, and provide a reliable test for a positive valuation of the fund. We find that not all fund categories exhibit significant nonlinearities, and that only a few strategies provide significant value to investors. Our methodology helps identify individual funds that provide value in an otherwise poorly performing category. Copyright (C) 2010 John Wiley & Sons, Ltd.

Date: 2011
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http://hdl.handle.net/10.1002/jae.1147

Related works:
Working Paper: Assessing and Valuing the Non-Linear Structure of Hedge Fund Returns (2006)
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