Hedge Fund Investing: Some Quantitative Notes

32 Pages Posted: 14 Mar 2005

See all articles by Craig W. French

Craig W. French

Portfolio Engineering Laboratory

Jim Kyung-Soo Liew

Johns Hopkins University - Carey Business School

Date Written: February 28, 2005

Abstract

Five current topics in hedge fund investing are examined from a quantitative perspective. First, we argue that investors should employ multi-factor models with observable market factors when attempting to separate alpha from beta. Second, we highlight the importance of testing for positive serial correlation in hedge fund returns, and we present evidence that this problem is pervasive. Third, we examine some of the difficulties with applying academic techniques to portfolio construction, and suggest several pragmatic solutions to overcome them. Fourth, we provide evidence that manager selection may be more important than strategy allocation for hedge fund investing. Fifth, we discuss the implication of negatively skewed returns in the construction of a portfolio of hedge funds.

Keywords: hedge fund, factor model, serial correlation, portfolio construction, asset allocation, skew

JEL Classification: G00

Suggested Citation

French, Craig W. and Liew, Jim Kyung-Soo, Hedge Fund Investing: Some Quantitative Notes (February 28, 2005). Available at SSRN: https://ssrn.com/abstract=679061 or http://dx.doi.org/10.2139/ssrn.679061

Craig W. French (Contact Author)

Portfolio Engineering Laboratory ( email )

115 Pondview Drive
Washington Crossing, PA Pennsylvania 18977
United States
6108446040 (Phone)

Jim Kyung-Soo Liew

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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