Hedge fund replication using strategy specific factors
Abstract Hedge funds have traditionally served wealthy individuals and institutional investors with the promise of delivering protection of capital and uncorrelated positive returns irrespective of market direction, allowing them to better manage portfolio risk. However, the financial crisis of 2008...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
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SpringerOpen
2019-03-01
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| Series: | Financial Innovation |
| Subjects: | |
| Online Access: | http://link.springer.com/article/10.1186/s40854-019-0127-3 |
| _version_ | 1819134959012544512 |
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| author | Sujit Subhash David Enke |
| author_facet | Sujit Subhash David Enke |
| author_sort | Sujit Subhash |
| collection | DOAJ |
| description | Abstract Hedge funds have traditionally served wealthy individuals and institutional investors with the promise of delivering protection of capital and uncorrelated positive returns irrespective of market direction, allowing them to better manage portfolio risk. However, the financial crisis of 2008 has heightened investor sensitivity to the high fees, illiquidity, lack of transparency, and lockup periods typically associated with hedge funds. Hedge fund replication products, or clones, seek to answer these challenges by providing daily liquidity, transparency, and immediate exposure to a desired hedge fund strategy. Nonetheless, although lowering cost and adding simplicity by using a common set of factors, traditional replication products might offer lower risk-reward performance compared to hedge funds. This research explores hedge fund replication further by examining the importance of constructing clones with specific factors relevant to each hedge fund strategy, and then compares the strategy specific clone risk and reward performance against both actual hedge fund performance and hedge fund clones constructed using a more general set of common factors. Testing shows that using strategy specific factors to replicate common hedge fund strategies can offer superior risk-reward performance compared to previous general model clones. |
| first_indexed | 2024-12-22T10:11:28Z |
| format | Article |
| id | doaj.art-14d71f0d66444d37ba2b38bb8d146e60 |
| institution | Directory Open Access Journal |
| issn | 2199-4730 |
| language | English |
| last_indexed | 2024-12-22T10:11:28Z |
| publishDate | 2019-03-01 |
| publisher | SpringerOpen |
| record_format | Article |
| series | Financial Innovation |
| spelling | doaj.art-14d71f0d66444d37ba2b38bb8d146e602022-12-21T18:29:50ZengSpringerOpenFinancial Innovation2199-47302019-03-015111910.1186/s40854-019-0127-3Hedge fund replication using strategy specific factorsSujit Subhash0David Enke1Laboratory for Investment and Financial Engineering, Department of Engineering Management and Systems Engineering, Missouri University of Science and TechnologyLaboratory for Investment and Financial Engineering, Department of Engineering Management and Systems Engineering, Missouri University of Science and TechnologyAbstract Hedge funds have traditionally served wealthy individuals and institutional investors with the promise of delivering protection of capital and uncorrelated positive returns irrespective of market direction, allowing them to better manage portfolio risk. However, the financial crisis of 2008 has heightened investor sensitivity to the high fees, illiquidity, lack of transparency, and lockup periods typically associated with hedge funds. Hedge fund replication products, or clones, seek to answer these challenges by providing daily liquidity, transparency, and immediate exposure to a desired hedge fund strategy. Nonetheless, although lowering cost and adding simplicity by using a common set of factors, traditional replication products might offer lower risk-reward performance compared to hedge funds. This research explores hedge fund replication further by examining the importance of constructing clones with specific factors relevant to each hedge fund strategy, and then compares the strategy specific clone risk and reward performance against both actual hedge fund performance and hedge fund clones constructed using a more general set of common factors. Testing shows that using strategy specific factors to replicate common hedge fund strategies can offer superior risk-reward performance compared to previous general model clones.http://link.springer.com/article/10.1186/s40854-019-0127-3Hedge fundsHedge fund replicationRegressionTrading strategiesStrategy specific factors |
| spellingShingle | Sujit Subhash David Enke Hedge fund replication using strategy specific factors Financial Innovation Hedge funds Hedge fund replication Regression Trading strategies Strategy specific factors |
| title | Hedge fund replication using strategy specific factors |
| title_full | Hedge fund replication using strategy specific factors |
| title_fullStr | Hedge fund replication using strategy specific factors |
| title_full_unstemmed | Hedge fund replication using strategy specific factors |
| title_short | Hedge fund replication using strategy specific factors |
| title_sort | hedge fund replication using strategy specific factors |
| topic | Hedge funds Hedge fund replication Regression Trading strategies Strategy specific factors |
| url | http://link.springer.com/article/10.1186/s40854-019-0127-3 |
| work_keys_str_mv | AT sujitsubhash hedgefundreplicationusingstrategyspecificfactors AT davidenke hedgefundreplicationusingstrategyspecificfactors |