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Hedge fund benchmarks: A risk-based approach

Publication ,  Journal Article
Fung, W; Hsieh, DA
Published in: Financial Analysts Journal
January 1, 2004

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.

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Published In

Financial Analysts Journal

DOI

ISSN

0015-198X

Publication Date

January 1, 2004

Volume

60

Issue

5

Start / End Page

65 / 80

Related Subject Headings

  • Finance
  • 3502 Banking, finance and investment
  • 3501 Accounting, auditing and accountability
  • 1502 Banking, Finance and Investment
  • 1501 Accounting, Auditing and Accountability
 

Citation

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Fung, W., & Hsieh, D. A. (2004). Hedge fund benchmarks: A risk-based approach. Financial Analysts Journal, 60(5), 65–80. https://doi.org/10.2469/faj.v60.n5.2657
Fung, W., and D. A. Hsieh. “Hedge fund benchmarks: A risk-based approach.” Financial Analysts Journal 60, no. 5 (January 1, 2004): 65–80. https://doi.org/10.2469/faj.v60.n5.2657.
Fung W, Hsieh DA. Hedge fund benchmarks: A risk-based approach. Financial Analysts Journal. 2004 Jan 1;60(5):65–80.
Fung, W., and D. A. Hsieh. “Hedge fund benchmarks: A risk-based approach.” Financial Analysts Journal, vol. 60, no. 5, Jan. 2004, pp. 65–80. Scopus, doi:10.2469/faj.v60.n5.2657.
Fung W, Hsieh DA. Hedge fund benchmarks: A risk-based approach. Financial Analysts Journal. 2004 Jan 1;60(5):65–80.

Published In

Financial Analysts Journal

DOI

ISSN

0015-198X

Publication Date

January 1, 2004

Volume

60

Issue

5

Start / End Page

65 / 80

Related Subject Headings

  • Finance
  • 3502 Banking, finance and investment
  • 3501 Accounting, auditing and accountability
  • 1502 Banking, Finance and Investment
  • 1501 Accounting, Auditing and Accountability