Asset Based Style Analysis for Equity Strategies

Abstract

Many of the factors used in performing asset-based style analysis (ABS) for hedge fund investments are straightforward and well-accepted. In the area of equity hedge funds, a long market index factor, a small-minus-large cap factor, and a value-minus-growth factor seem to be well-accepted components of an equity hedge fund ABS model. Little attention, however, has been given to understanding the most relevant volatility factors and their relative merits. This article explores the effectiveness of various volatility factors. The results show that calls and puts on market indices provide intuitive measures of volatility with reasonably high levels of explanatory power for the variation in returns in comparison to other volatility factors.