Tracking Hedge Funds Using Sparse Clones

26 Pages Posted: 10 Aug 2015 Last revised: 12 Sep 2016

See all articles by Margherita Giuzio

Margherita Giuzio

European Central Bank (ECB)

Kay Eichhorn-Schott

EBS Universität für Wirtschaft und Recht

Sandra Paterlini

University of Trento - Department of Economics and Management

Vincent Weber

Resonanz Capital

Date Written: July 21, 2015

Abstract

Whether hedge fund returns could be attributed to systematic risk exposures rather than managerial skills is an interesting debate among academics and practitioners. Academic literature suggests that hedge fund performance is mostly determined by alternative betas, which justifies the construction of investable hedge fund clones or replicators. Practitioners often claim that management skills are instrumental for successful performance. In this paper, we study the risk exposure of different hedge fund indices to a set of liquid asset class factors by means of style analysis. We extend the classical style analysis framework by including a penalty that allows to retain only relevant factors, dealing effectively with collinearity, and to capture the out-of-sample properties of hedge fund indices by closely mimicking their returns. In particular, we introduce a Log-penalty and discuss its statistical properties, showing then that Log-clones are able to closely track the returns of hedge fund indices with a smaller number of factors and lower turnover than the clones built from state-of-art methods.

Keywords: Hedge Fund Replication, Sharpe Style Analysis, LASSO Regression, Alternative Betas

Suggested Citation

Giuzio, Margherita and Eichhorn-Schott, Kay and Paterlini, Sandra and Weber, Vincent, Tracking Hedge Funds Using Sparse Clones (July 21, 2015). Available at SSRN: https://ssrn.com/abstract=2641909 or http://dx.doi.org/10.2139/ssrn.2641909

Margherita Giuzio (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Kay Eichhorn-Schott

EBS Universität für Wirtschaft und Recht ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany

Sandra Paterlini

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

Vincent Weber

Resonanz Capital ( email )

Frankfurt
Germany

HOME PAGE: http://www.resonanzcapital.com

Register to save articles to
your library

Register

Paper statistics

Downloads
277
Abstract Views
1,382
rank
109,094
PlumX Metrics