Abstract

http://ssrn.com/abstract=470642
 
 

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Quantitative Selection of Long-Short Hedge Funds


Kaifeng Kevin Chen


Universite de Lausanne; International Center FAME

Alexander Passow


International Center FAME

July 2003

FAME Research Paper No. 94

Abstract:     
We develop a quantitative model to select hedge funds in the long-short equity sector. The selection strategy is verified on a survivorship-bias-free hedge fund database, from January 1990 to September 2002. We focus on the hedge funds acting exclusively in the U.S. market. We identify Fama-French factors and GSCI as the risk factors. Based on the evidence that many hedge funds do not exhibit persistent performance, we believe that persistent alpha is not generated based on publicly available information and opportunistic changes of exposure with respect to the risk factors. Instead we expect moderate exposure funds to be those who establish investment decisions based on special information or proprietary research. A hedge fund selection strategy is introduced and checked with out-of-sample data. A simulation of hedge funds from 1927 to 2002 is conducted. The funds selected according to our strategy demonstrate superior performance persistently.

Number of Pages in PDF File: 57

Keywords: Hedge Fund, Long Short Strategy, Fama-French, Commodity, Performance Persistence, Skewness, Selection.

JEL Classification: C40, G11, G13

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Date posted: January 5, 2005  

Suggested Citation

Chen, Kaifeng Kevin and Passow, Alexander, Quantitative Selection of Long-Short Hedge Funds (July 2003). FAME Research Paper No. 94. Available at SSRN: http://ssrn.com/abstract=470642 or http://dx.doi.org/10.2139/ssrn.470642

Contact Information

Kaifeng Kevin Chen (Contact Author)
Universite de Lausanne ( email )
Lausanne, 1015
Switzerland
+41-21-692-3358 (Phone)
International Center FAME
40, Boulevard du Pont-d'Arve
Case Postale 3
1211 Geneva 4, CH-6900
Switzerland
Alexander Passow
International Center FAME ( email )
40, Boulevard du Pont-d'Arve
Case Postale 3
1211 Geneva 4, CH-6900
Switzerland
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