Short-term hedge fund performance

Hedge fund returns are often explained using linear factor models such as Fung and Hsieh (2004). However, since most hedge funds live only for 3years, these linear regressions are subject to over-parameterization. I improve the out-of-sample accuracy of the linear factor model by combining cross-sec...

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Bibliographic Details
Published inJournal of banking & finance Vol. 37; no. 11; pp. 4404 - 4431
Main Author Slavutskaya, Anna
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.11.2013
Elsevier Sequoia S.A
Subjects
Cross-sectional analysis
Financial information
Hedge fund modeling
Hedge funds
Investment funds
Investment policy
Investment returns
Linear models
Mathematical models
Panel data
Persistence
Regression analysis
Risk adjustment
Short sample
Shrinkage
Studies
Time series
Persistence
Panel data
Short sample
Hedge fund modeling
G12
Shrinkage
G29
Online AccessGet full text
ISSN0378-4266
1872-6372
DOI10.1016/j.jbankfin.2013.07.034

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Summary:Hedge fund returns are often explained using linear factor models such as Fung and Hsieh (2004). However, since most hedge funds live only for 3years, these linear regressions are subject to over-parameterization. I improve the out-of-sample accuracy of the linear factor model by combining cross-sectional and time series information for groups of hedge funds with similar investment strategies. The additional cross-sectional information allows more accurate estimates of risk exposures. I also propose a trading strategy based on this methodology for extracting substantially larger risk-adjusted returns.
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ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2013.07.034