Evaluating Hedge Funds with Pooled Benchmarks

Management Science, Forthcoming

38 Pages Posted: 12 Dec 2012 Last revised: 21 Aug 2014

Michael S. O'Doherty

University of Missouri at Columbia - Department of Finance

N. Eugene Savin

University of Iowa - Henry B. Tippie College of Business - Department of Economics

Ashish Tiwari

University of Iowa

Date Written: August 19, 2014

Abstract

The evaluation of hedge fund performance is challenging given the flexible nature of hedge funds' strategies and their lack of operational transparency. As a result inference about skill is inevitably contaminated by the error in the benchmark model. To address this concern, we propose a model pooling approach to develop a fund-specific benchmark obtained by pooling a set of diverse attribution models. We illustrate the advantages of a pooled benchmark over alternative approaches, including the Fung and Hsieh (2004) model and stepwise regression methods, in the contexts of a real-time investment strategy, hedge fund replication, and fund failure prediction.

Keywords: Hedge funds, Model pooling, Model combination, Performance evaluation, Predictive distributions, Log predictive score

JEL Classification: C11, C52, C53, G12

Suggested Citation

O'Doherty, Michael S. and Savin, N. Eugene and Tiwari, Ashish, Evaluating Hedge Funds with Pooled Benchmarks (August 19, 2014). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2188188 or http://dx.doi.org/10.2139/ssrn.2188188

Michael S. O'Doherty

University of Missouri at Columbia - Department of Finance ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States

Nathan Eugene Savin

University of Iowa - Henry B. Tippie College of Business - Department of Economics ( email )

108 Pappajohn Building
Iowa City, IA 52242
United States
319-335-0855 (Phone)

Ashish Tiwari (Contact Author)

University of Iowa ( email )

Finance Department
Henry B. Tippie College of Business, 108 PBB
Iowa City, IA 52242
United States
(319) 353-2185 (Phone)
(319) 335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/atiwari

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