HEDGE FUNDS: RISK AND PERFORMANCE

Sangheon Shin, Jan Smolarski and Gökçe Soydemir
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Sangheon Shin: Department of Accounting & Finance, Percy J. Vaughn, Jr. College of Business Administration, Alabama State University, 915 S. Jackson St., Montgomery, AL 36117, USA
Jan Smolarski: Department of Accounting and Finance, William G. Rohrer College of Business, Rowan University, 201 Mullica Road, Glassboro, NJ 08028, USA
Gökçe Soydemir: Department of Accounting & Finance, College of Business Administration, California State University, Stanislaus, One University Circle, Turlock CA, 95382, USA

Journal of Financial Management, Markets and Institutions (JFMMI), 2018, vol. 06, issue 01, 1-43

Abstract: This paper models hedge fund exposure to risk factors and examines time-varying performance of hedge funds. From existing models such as asset-based style (ABS)-factor model, standard asset class (SAC)-factor model, and four-factor model, we extract the best six factors for each hedge fund portfolio by investment strategy. Then, we find combinations of risk factors that explain most of the variance in performance of each hedge fund portfolio based on investment strategy. The results show instability of coefficients in the performance attribution regression. Incorporating a time-varying factor exposure feature would be the best way to measure hedge fund performance. Furthermore, the optimal models with fewer factors exhibit greater explanatory power than existing models. Using rolling regressions, our customized investment strategy model shows how hedge funds are sensitive to risk factors according to market conditions.

Keywords: Hedge funds; risk factor; performance; capital asset pricing model; instant history bias; survivorship bias (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:jfmmix:v:06:y:2018:i:01:n:s2591768418500034

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DOI: 10.1142/S2591768418500034

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