RT Journal Article
SR Electronic
T1 To Hedge or Not to Hedge: <em>Factor Dependence and Skill among Hedge Funds</em>
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP 43
OP 60
DO 10.3905/jai.2017.20.1.043
VO 20
IS 1
A1 Arjun Jayaraman
A1 MacDuff Kuhnert
A1 Joseph Gubler
A1 Ryan Myers
YR 2017
UL https://pm-research.com/content/20/1/43.abstract
AB 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.TOPICS: Real assets/alternative investments/private equity, factor-based models, manager selection, statistical methods