Dynamic Investment Strategies of Hedge Funds

Abstract:     
In this paper we study the investment dynamics employed by hedge fund managers. Using daily data for nine investable hedge fund strategies, we use a rolling-over regression technique, which allows us to capture the time-variability present in the different strategies of hedge fund managers. The results indicate that the inclusion of time-variability is important as the risk exposures change significantly over time. Our results show no evidence of traditional alpha out-performance within a multifactor framework. Given this inability to generate consistent alpha returns, we also analyze the performance data relative to the factor specific beta risk. To this end, we replicate static hedge fund returns and compare them to the actual hedge fund returns. We conclude that most hedge fund returns beat the replicated static trading strategy. This suggests that particular hedge funds add alpha return through the skill of timing alternative beta risk.

Keywords: Abnormal returns, Hedge funds, Multifactor model, Studies, Investment, Dynamics, Data, Strategy, Regression, Managers, Risk, Exposure, Time, Framework, Performance

JEL Classifications: G12, G29

Working Paper Series