63 Pages Posted: 4 Mar 2007
Date Written: August 28, 2007
Accurate appraisal of hedge fund performance must recognize the freedom with which managers shift asset classes, strategies, and leverage in response to changing market conditions and arbitrage opportunities. The standard measure of performance is the abnormal return defined by a hedge fund's exposure to risk factors. If exposures are assumed constant when, in fact, they vary through time, estimated abnormal returns may be incorrect. We employ an optimal changepoint regression that allows risk exposures to shift, and illustrate the impact on performance appraisal using a sample of live and dead funds during the period January 1994 through December 2005.
Keywords: hedge funds, factor models, time-varying beta
JEL Classification: G10, G12, G13
Suggested Citation: Suggested Citation
Bollen, Nicolas P. B. and Whaley, Robert E., Hedge Fund Risk Dynamics: Implications for Performance Appraisal (August 28, 2007). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=937972 or http://dx.doi.org/10.2139/ssrn.937972
By Bing Liang