16 Pages Posted: 2 Mar 2012 Last revised: 13 Aug 2015
Date Written: December 19, 2011
Hedge Fund (HF) managers are expected to create excess investment returns (Alpha) through two primary skills based sources: (i) Security selection: buying undervalued securities and selling overvalued securities. (ii) Market timing: entering markets in advance of, or when they are rising and exiting, or shorting them when they are declining. In this paper we employ a Kalman Filtering approach to measure the skills based component of HF returns. We separately quantify value generated through market timing and security selection decisions over various market regimes and detail the characteristics of HF Alpha.
Keywords: Hedge Funds, alpha,market timing, security selection
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