Recent advances in explaining hedge fund returns: Implicit factors and exposures

Abstract

We survey articles covering how hedge funds returns are explained, using largely nonlinear multifactor models that examine the non-linear pay-offs and exposures of hedge funds. We provide an integrated view of the implicit factor and statistical factor models that are largely able to explain the hedge fund return-generating process. We present their evolution through time by discussing pioneering studies that made a significant contribution to knowledge, and also recent innovative studies that examine hedge funds exposures using advanced econometric methods. This is the first review that analyzes very recent studies that explain a large part of hedge fund variation. We conclude by presenting some gaps for future research. Recent Advances in Explaining Hedge Fund Returns: Implicit Factors and Exposures AbstractWe survey articles covering how hedge funds returns are explained, using largely nonlinear multifactor models that examine the non-linear pay-offs and exposures of hedge funds. We provide an integrated view of the implicit factor and statistical factor models that are largely able to explain the hedge fund return-generating process. We present their evolution through time by discussing pioneering studies that made a significant contribution to knowledge, and also recent innovative studies that examine hedge funds exposures using advanced econometric methods. This is the first review that analyzes very recent studies that explain a large part of hedge fund variation. We conclude by presenting some gaps for future research.Keywords: hedge fund performance; implicit factors; statistical factors; linear and non-linear multi-factor models; alpha and beta returns 1

Can Hedge Fund Returns Be Predicted?

“…With increased forecast accuracy, their models could select portfolios that significantly outperform the benchmark. Stafylas et al, provided an integrated view of the implicit and statistical factor models [7]. They found out a few exposures that were valid for nearly every hedge fund strategy, such as macroeconomic risk.…”

A Model for Estimating Daily Hedge Fund Net Asset Value

“…Jackwerth PAGE 4 OF 24 and Slavutskaya (2016) assess the addition of alternative assets to pension fund portfolios in terms of the total benefit derived from diversification, addition of positive skewness, and the elimination of left tails of returns. Stafylas et al (2017) provide an integrated view of the implicit factors and statistical factor models that are largely able to explain the hedge fund return-generating process. Joenväärä et al (2019) re-examine the fundamental questions regarding hedge fund performance and find a significant association between fund-characteristics related to share restrictions as well as compensation structure and risk-adjusted returns.…”