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The Journal of Alternative Investments

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Article

Dynamic Hedge Fund Exposures:
One Size Estimation Interval Doesn’t Fit All

Brian T. Hayes
The Journal of Alternative Investments Summer 2013, 16 (1) 86-117; DOI: https://doi.org/10.3905/jai.2013.16.1.086
Brian T. Hayes
is an executive director at Morgan Stanley Research in New York, NY.
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  • For correspondence: brian.t.hayes@morganstanley.com
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Abstract

Investors frequently use rolling regressions to estimate dynamic factor exposures. The estimation interval is an important parameter, but is often set unsystematically. The author studies interval selection through a model in which a fund’s factor exposure switches between high and low states, and investors track or clone this exposure with a rolling regression. The mean square error between the fund and clone depends on the fund’s exposure turnover and idiosyncratic risk, as well as the estimation interval. Lower idiosyncratic risk and higher turnover favor shorter intervals, but when turnover is sufficiently high, an expanding window is superior to fixed intervals. Consistent with the article’s model, expanding interval clones of some popular hedge fund indexes have smaller errors than those based on rolling intervals of any length.

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The Journal of Alternative Investments: 16 (1)
The Journal of Alternative Investments
Vol. 16, Issue 1
Summer 2013
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Dynamic Hedge Fund Exposures:
One Size Estimation Interval Doesn’t Fit All
Brian T. Hayes
The Journal of Alternative Investments Jun 2013, 16 (1) 86-117; DOI: 10.3905/jai.2013.16.1.086

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Dynamic Hedge Fund Exposures:
One Size Estimation Interval Doesn’t Fit All
Brian T. Hayes
The Journal of Alternative Investments Jun 2013, 16 (1) 86-117; DOI: 10.3905/jai.2013.16.1.086
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  • Article
    • Abstract
    • LITERATURE REVIEW
    • ROLLING REGRESSIONS OF FUNDS WITH MARKOV-SWITCHING EXPOSURE
    • THEORETICAL FRAMEWORK
    • PROPERTIES OF MSE FOR CLONES OF THE REGIME-SWITCHING FUND
    • OPTIMAL ESTIMATION INTERVALS FOR HEDGE FUND INDEXES
    • APPLYING THE MARKOV-SWITCHING EXPOSURE MODEL TO HEDGE FUND INDEXES
    • ESTIMATION INTERVALS FOR MULTI-FACTOR MODELS OF HEDGE FUND INDEXES
    • CONCLUSION
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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