A Factor-Based Application to Hedge Fund Replication

Marco Rossi and Sergio L. Rodríguez

Chapter 12 in Hedge Fund Replication, 2012, pp 159-190 from Palgrave Macmillan

Abstract: Abstract Hedge fund returns are generally considered to be little correlated with market returns. Skills and dynamic strategies are claimed to generate more complex risk exposures that yield superior performance (alpha) or complementary sources of risk premium (alternative beta) through bear and bull markets by using a broad range of instruments, such as derivatives, leverage, short selling, and arbitrage across markets. This market neutrality feature of hedge funds would suggest that investing in hedge funds, either directly or through funds of hedge funds, could be an effective tool of portfolio diversification, hence making it appealing for a large range of institutional investors and high-wealth individuals.1 However, hedge funds (1) provide limited liquidity, as resources are usually “locked up” for 1–3 years; (2) impose high management fees (up to 5 percent a year); and (3) offer poor transparency.

Keywords: Hedge Fund; Financial Distress; Credit Spread; Hedge Fund Manager; Hedge Fund Return (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-0-230-35831-7_12

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DOI: 10.1057/9780230358317_12

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