Using Risk Factors to Understand Long/Short Equity Mutual Fund Returns

Lipper Insight, January 2014

6 Pages Posted: 4 Mar 2014

Date Written: February 1, 2014

Abstract

In this article we examine the risk factors that help explain long/short equity (LSE) mutual fund performance. We show that for most LSE mutual funds, 50%-80% of their returns can be explained using common factors such as capitalization, book-to-value ratio, dividend yield, and volatility. The explanatory strength of these factors is so strong that in most cases adding an option overlay using puts and calls (to mimic long and short positions) adds little or no explanatory value. We also show that while many funds have positive alpha, these alphas for the most part are not statistically significant, i.e., in reality they are not different than zero.

Keywords: liquid alternative-investment funds, risk factors, betas, alphas

JEL Classification: C12, C13, C51, C52, G12

Suggested Citation

Clark, Andrew, Using Risk Factors to Understand Long/Short Equity Mutual Fund Returns (February 1, 2014). Lipper Insight, January 2014, Available at SSRN: https://ssrn.com/abstract=2404037 or http://dx.doi.org/10.2139/ssrn.2404037

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