Neutralizing Betas without Neutralizing Alphas in Funds of Hedge Funds

Abstract

Identification of the relevant factors that drive hedge fund returns is an important component to institutional quality fund of funds investing. We focus specifically on the importance of analyzing the alpha and beta return generators. Additionally, we discuss tail-risk management and the practical methods for mitigation of the point mis-estimation problem in mean-variance optimization of portfolios of hedge funds.

Keywords: hedge fund, factor model, serial correlation, portfolio construction, asset allocation, skew

JEL Classification: G00