Hedge Fund Benchmarks: A Risk Based Approach
Subject
Finance
Publishing details
Centre for Hedge Fund Research and Education Working Paper
Publication Year
2004
Abstract
Following a review of the data and methodological difficulties in applying conventional models used for traditional asset class indexes to hedge funds, this article argues against the conventional approach. Instead, in an extension of previous work on asset-based style (ABS) factors, the article proposes a model of hedge fund returns that is similar to models based on arbitrage pricing theory, with dynamic risk-factor coefficients. For diversified hedge fund portfolios (as proxied by indexes of hedge funds and funds of hedge funds), the seven ABS factors can explain up to 80 percent of monthly return variations. Because ABS factors are directly observable from market prices, this model provides a standardized framework for identifying differences among major hedge fund indexes that is free of the biases inherent in hedge fund databases.
Publication Notes
Financial Analysts Journal, Vol 60, No 5, pp 65-80, Sept/Oct 2004
Publication Research Centre
Hedge Fund Centre
Series Number
HF-014
Series
Centre for Hedge Fund Research and Education Working Paper
Available on ECCH
No
