On the Dynamics of Hedge Fund Strategies

Posted: 22 May 2019

See all articles by Li Cai

Li Cai

Illinois Institute of Technology - Stuart School of Business, IIT

Bing Liang

University of Massachusetts Amherst - Department of Finance

Date Written: September 26, 2010

Abstract

Hedge fund managers are largely free to pursue dynamic trading strategies and standard static performance appraisal is no longer accurate for evaluating hedge funds. Accordingly, this paper presents some new ways of analyzing hedge fund strategies following a dynamic linear regression model. Statistical residual diagnostics are considered to assess the appropriate use of the model. We unveil dynamic alphas and betas for each investment style during the period of January 1994 to December 2008. We examine the in-sample goodness-of-fit and out-of-sample predictability on hedge fund performance. By simulating a hypothetical trading strategy, we demonstrate that the model-based predictability helps to implement a profitable fund selection process. Finally, timing skills can be directly examined with a dynamic model; we find significant evidence on market timing, volatility timing and liquidity timing, which is consistent with the timing literature in hedge funds.

Suggested Citation

Cai, Li and Liang, Bing, On the Dynamics of Hedge Fund Strategies (September 26, 2010). https://doi.org/10.3905/jai.2012.14.4.051 . Available at SSRN: https://ssrn.com/abstract=2029273 or http://dx.doi.org/10.2139/ssrn.2029273

Li Cai (Contact Author)

Illinois Institute of Technology - Stuart School of Business, IIT ( email )

Chicago, IL 60661
United States

Bing Liang

University of Massachusetts Amherst - Department of Finance ( email )

Amherst, MA 01003
United States

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