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Intertemporal Variation in the Performance of Hedge Funds Employing a Contingent-Claim-Based Benchmark

47 Pages Posted: 26 Mar 2001  

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Date Written: June 6, 2001

Abstract

Since it is well known that hedge fund returns exhibit non-linear option-like exposures to standard asset classes, traditional linear factor models offer limited help in capturing the risk-return tradeoffs offered by hedge funds. This paper employs a combination of passive buy-and-hold strategies and option-based strategies to characterize the risks of different hedge fund strategies. Although, in practice, these hedge funds can follow a myriad of dynamic trading strategies, we find that adding a few simple option writing/buying strategies to the linear multi-factor model enables us to capture a significant proportion of the variation in the hedge fund returns over time. We verify the ability of our approach to capture important hedge fund risk exposures by conducting out-of-sample analysis. Our approach can provide valuable insights into the nature of risks involved in investing in different hedge fund strategies.

JEL Classification: G10, G19

Suggested Citation

Agarwal, Vikas, Intertemporal Variation in the Performance of Hedge Funds Employing a Contingent-Claim-Based Benchmark (June 6, 2001). EFMA 2001 Lugano Meetings. Available at SSRN: https://ssrn.com/abstract=264766 or http://dx.doi.org/10.2139/ssrn.264766

Vikas Agarwal (Contact Author)

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
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HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

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