The search for alpha continues. Estimating time-varying risk premia of hedge funds with a conditional model.
(2011) NEKM03 20111Department of Economics
- Abstract
- Numerous past studies investigating the performance of hedge funds suffer from two distinct problems: unreliable and biased return data inherent in virtually all databases and the use of static asset-pricing models. Using “indexes of indexes” for our hedge fund returns, both free of biases and highly representative, we investigate which risk factors investors are exposed to and whether hedge fund managers are able to consistently yield abnormal returns during the period February 1997 to January 2011. To measure abnormal returns, we focus on three different asset-pricing models. We argue that the static CAPM and Fama-French Three-Factor model are ill suited to benchmark hedge fund returns over time. The introduced time-varying five-factor... (More)
- Numerous past studies investigating the performance of hedge funds suffer from two distinct problems: unreliable and biased return data inherent in virtually all databases and the use of static asset-pricing models. Using “indexes of indexes” for our hedge fund returns, both free of biases and highly representative, we investigate which risk factors investors are exposed to and whether hedge fund managers are able to consistently yield abnormal returns during the period February 1997 to January 2011. To measure abnormal returns, we focus on three different asset-pricing models. We argue that the static CAPM and Fama-French Three-Factor model are ill suited to benchmark hedge fund returns over time. The introduced time-varying five-factor model adds market timing and a proxy for left-tail events to the traditional Fama-French factors. The combination of the presented risk factors and business cycle proxies, used as instruments, has not previously been studied. The conditional model presented in this thesis is able to capture time-variations in business cycles and therefore proves to be superior to the static models examined. We find that around 50% of investigated strategies earn significant abnormal returns. In addition, we show that investors require a risk premium for the exposure to left tail events. Whether hedge fund managers possess a positive market timing ability is debatable and subject to further research. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/1973795
- author
- Dyrssen, Henrik LU and Gloner, Jakob LU
- supervisor
- organization
- course
- NEKM03 20111
- year
- 2011
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Abnormal Returns, Conditional Model, Hedge Funds, Principal Components, PUT Write Index
- language
- English
- id
- 1973795
- date added to LUP
- 2011-06-15 13:00:34
- date last changed
- 2011-06-15 13:00:34
@misc{1973795, abstract = {{Numerous past studies investigating the performance of hedge funds suffer from two distinct problems: unreliable and biased return data inherent in virtually all databases and the use of static asset-pricing models. Using “indexes of indexes” for our hedge fund returns, both free of biases and highly representative, we investigate which risk factors investors are exposed to and whether hedge fund managers are able to consistently yield abnormal returns during the period February 1997 to January 2011. To measure abnormal returns, we focus on three different asset-pricing models. We argue that the static CAPM and Fama-French Three-Factor model are ill suited to benchmark hedge fund returns over time. The introduced time-varying five-factor model adds market timing and a proxy for left-tail events to the traditional Fama-French factors. The combination of the presented risk factors and business cycle proxies, used as instruments, has not previously been studied. The conditional model presented in this thesis is able to capture time-variations in business cycles and therefore proves to be superior to the static models examined. We find that around 50% of investigated strategies earn significant abnormal returns. In addition, we show that investors require a risk premium for the exposure to left tail events. Whether hedge fund managers possess a positive market timing ability is debatable and subject to further research.}}, author = {{Dyrssen, Henrik and Gloner, Jakob}}, language = {{eng}}, note = {{Student Paper}}, title = {{The search for alpha continues. Estimating time-varying risk premia of hedge funds with a conditional model.}}, year = {{2011}}, }