%0 Journal Article
%A Jayaraman, Arjun
%A Kuhnert, MacDuff
%A Gubler, Joseph
%A Myers, Ryan
%T To Hedge or Not to Hedge: *Factor Dependence and Skill among Hedge Funds*
%D 2017
%R 10.3905/jai.2017.20.1.043
%J The Journal of Alternative Investments
%P 43-60
%V 20
%N 1
%X As average hedge fund performance continues to wane, investors are increasingly seeking objective criteria to distinguish talented hedge fund managers from among the herd. Differentiating the contributions of systematic and idiosyncratic factors in a fund’s return stream is one way to accomplish this goal. In this article, the authors combine two related, but distinct, measurements of these quantities. Using the Carhart four-factor model, the Fung–Hsieh seven-factor model, and principal components analysis, they find that the hedge funds with the highest factor-adjusted alpha (a proxy for skill) and lowest R2 to these factor models (a proxy for factor dependence) produce the strongest subsequent returns and factor-adjusted alphas. They also find that those managers with high trailing factor-adjusted alpha have lower exposure to systematic risk factors in general.
%U https://jai.pm-research.com/content/iijaltinv/20/1/43.full.pdf