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The search for alpha continues. Estimating time-varying risk premia of hedge funds with a conditional model.

Dyrssen, Henrik LU and Gloner, Jakob LU (2011) NEKM03 20111
Department 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)
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author
Dyrssen, Henrik LU and Gloner, Jakob LU
supervisor
organization
course
NEKM03 20111
year
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},
  keyword      = {Abnormal Returns,Conditional Model,Hedge Funds,Principal Components,PUT Write Index},
  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},
}