Econometric Issues in Modeling Returns and Managerial Efficiency in the Hedge Fund Industry
State University of New York (SUNY) at Albany, College of Arts and Sciences, Economics
Hany A. Shawky
State University of New York at Albany - School of Business and Center for Institutional Investment Management
Towson University - Department of Economics
Presented at the Special Issue of Managerial and Decision Economics conference “Effects of Alternative Investments on Entrepreneurship, Innovation, and Growth” conference, October 29, 2012, SUNY Global Center, NYC
The main focus of this paper is to explore the potential econometric im-provements that can be achieved in estimating hedge fund returns. Specifically, we examine the effects of incorporating the following three adjustments to estimating managerial efficiency; (1) a selection bias adjustment model, (2) a nonlinear specification; and (3) a fixed effect model. Diagnostic tests confirm the importance of these adjustments in modeling hedge fund return. We propose a model that incorporates all three issues while retaining simplicity and computational efficiency. Using hedge fund data over the period 1996-2008, our basic results show that when selectivity, nonlinearity, and fund heterogeneity are taken into account, a more robust estimate of the effect of key variables has on hedge fund return can be obtained and the overall explanatory power of the model can be improved.
Number of Pages in PDF File: 24
Date posted: June 29, 2012
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