Modelling and Replicating Hedge Fund Returns
The University of Melbourne, Centre for Actuarial Studies, Research Paper Series No. 203
22 Pages Posted: 28 Aug 2012 Last revised: 31 Aug 2012
Date Written: March 1, 2010
This paper provides discussion on factor-based modelling for hedge fund returns, and demonstrates replication via both rolling windows and Kalman filters. In particular, we focus on estimating time-varying hedge fund returns exposure through various asset-based style (ABS) factors. It is shown that certain hedge fund strategies are more susceptible to cloning, suggesting a higher likelihood of creating transparent liquid replication products as either an alternative investment vehicle or as a benchmarking / style analysis tool for institutional investors.
Keywords: hedge funds, hedge fund replication, Kalman filtering
JEL Classification: G11, G12
Suggested Citation: Suggested Citation