Hedge fund benchmarks: A risk-based approach

Published

Journal Article (Review)

Following a review of the data and methodological difficulties in applying conventional models used for traditional asset class indexes to hedge funds, this article argues against the conventional approach. Instead, in an extension of previous work on asset-based style (ABS) factors, the article proposes a model of hedge fund returns that is similar to models based on arbitrage pricing theory, with dynamic risk-factor coefficients. For diversified hedge fund portfolios (as proxied by indexes of hedge funds and funds of hedge funds), the seven ABS factors can explain up to 80 percent of monthly return variations. Because ABS factors are directly observable from market prices, this model provides a standardized framework for identifying differences among major hedge fund indexes that is free of the biases inherent in hedge fund databases.

Full Text

Duke Authors

Cited Authors

  • Fung, W; Hsieh, DA

Published Date

  • January 1, 2004

Published In

Volume / Issue

  • 60 / 5

Start / End Page

  • 65 - 80

International Standard Serial Number (ISSN)

  • 0015-198X

Digital Object Identifier (DOI)

  • 10.2469/faj.v60.n5.2657

Citation Source

  • Scopus