The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers

Posted: 11 Nov 2001  

David A. Hsieh

Duke University - Fuqua School of Business; Duke University - Department of Economics; National Bureau of Economic Research (NBER)

William Fung

Maple Financial Group

Abstract

Hedge fund strategies typically generate option-like returns. Linear-factor models using benchmark asset indices have difficulty explaining them. Following the suggestions in Glosten and Jagannathan (1994), this article shows how to model hedge fund returns by focusing on the popular 'trend-following' strategy. We use lookback straddles to model trend-following strategies, and show that they can explain trend-following funds' returns better than standard asset indices. While standard straddles lead to similar empirical results, lookback straddles are theoretically closer to the concept of trend following. Our model should be useful in the design of performance benchmarks for trend-following funds.

Keywords: Hedge fund, risk management, style factors, trend following, options

JEL Classification: G1, G11, G12

Suggested Citation

Hsieh, David A. and Fung, William, The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers. The Review of Financial Studies, Vol. 14, No. 2, Summer 2001 . Available at SSRN: https://ssrn.com/abstract=250542

David Arthur Hsieh (Contact Author)

Duke University - Fuqua School of Business ( email )

Department of Finance
Box 90120
Durham, NC 27708-0120
United States
919-660-7779 (Phone)
919-660-7961 (Fax)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

William (Bill) Fung

Maple Financial Group ( email )

79 Wellington Street West
Suite 3500
Toronto, Ontario M5K 1K7
Canada

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