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Econometric Issues in Modeling Returns and Managerial Efficiency in the Hedge Fund Industry

Presented at the Special Issue of Managerial and Decision Economics conference “Effects of Alternative Investments on Entrepreneurship, Innovation, and Growth” conference, October 29, 2012, SUNY Global Center, NYC

24 Pages Posted: 29 Jun 2012  

Kajal Lahiri

State University of New York (SUNY) at Albany, College of Arts and Sciences, Economics

Hany A. Shawky

State University of New York at Albany - School of Business and Center for Institutional Investment Management

Yongchen Zhao

Towson University - Department of Economics

Date Written: June 2012

Abstract

The main focus of this paper is to explore the potential econometric im-provements that can be achieved in estimating hedge fund returns. Specifically, we examine the effects of incorporating the following three adjustments to estimating managerial efficiency; (1) a selection bias adjustment model, (2) a nonlinear specification; and (3) a fixed effect model. Diagnostic tests confirm the importance of these adjustments in modeling hedge fund return. We propose a model that incorporates all three issues while retaining simplicity and computational efficiency. Using hedge fund data over the period 1996-2008, our basic results show that when selectivity, nonlinearity, and fund heterogeneity are taken into account, a more robust estimate of the effect of key variables has on hedge fund return can be obtained and the overall explanatory power of the model can be improved.

Suggested Citation

Lahiri, Kajal and Shawky, Hany A. and Zhao, Yongchen, Econometric Issues in Modeling Returns and Managerial Efficiency in the Hedge Fund Industry (June 2012). Presented at the Special Issue of Managerial and Decision Economics conference “Effects of Alternative Investments on Entrepreneurship, Innovation, and Growth” conference, October 29, 2012, SUNY Global Center, NYC. Available at SSRN: https://ssrn.com/abstract=2095296 or http://dx.doi.org/10.2139/ssrn.2095296

Kajal Lahiri

State University of New York (SUNY) at Albany, College of Arts and Sciences, Economics ( email )

Department of Economics
1400 Washington Avenue
Albany, NY 12222
United States
518-442 4758 (Phone)
518-442 4736 (Fax)

HOME PAGE: http://www.albany.edu/~klahiri

Hany A. Shawky (Contact Author)

State University of New York at Albany - School of Business and Center for Institutional Investment Management ( email )

School of Business
1400 Washington Ave.
Albany, NY 12222
United States
518-442-4921 (Phone)
518-442-3944 (Fax)

Yongchen Zhao

Towson University - Department of Economics ( email )

Towson, MD 21204
United States

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