Evaluating Hedge Funds with Pooled Benchmarks
Michael S. O'Doherty
University of Missouri at Columbia - Department of Finance
N. Eugene Savin
University of Iowa - Henry B. Tippie College of Business - Department of Economics
University of Iowa
August 19, 2014
Management Science, Forthcoming
The evaluation of hedge fund performance is challenging given the flexible nature of hedge funds' strategies and their lack of operational transparency. As a result inference about skill is inevitably contaminated by the error in the benchmark model. To address this concern, we propose a model pooling approach to develop a fund-specific benchmark obtained by pooling a set of diverse attribution models. We illustrate the advantages of a pooled benchmark over alternative approaches, including the Fung and Hsieh (2004) model and stepwise regression methods, in the contexts of a real-time investment strategy, hedge fund replication, and fund failure prediction.
Number of Pages in PDF File: 38
Keywords: Hedge funds, Model pooling, Model combination, Performance evaluation, Predictive distributions, Log predictive score
JEL Classification: C11, C52, C53, G12
Date posted: December 12, 2012 ; Last revised: August 21, 2014
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