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The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers

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Author Info
Fung, William
Hsieh, David A
Abstract

Hedge fund strategies typically generate option-like returns. Linear-factor models using benchmark asset indices have difficulty explaining them. Following the suggestions in Glosten and Jagannathan (1994), this article shows how to model hedge fund returns by focusing on the popular "trend-following" strategy. We use lookback straddles to model trend-following strategies, and show that they can explain trend-following funds' returns better than standard asset indices. Though standard straddles lead to similar empirical results, lookback straddles are theoretically closer to the concept of trend following. Our model should be useful in the design of performance benchmarks for trend-following funds. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 14 (2001)
Issue (Month): 2 ()
Pages: 313-41
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:oup:rfinst:v:14:y:2001:i:2:p:313-41

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  2. Mila Getmansky & Andrew W. Lo & Igor Makarov, 2003. "An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns," NBER Working Papers 9571, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Deetz, Marcus & Poddig, Thorsten & Varmaz, Armin, 2009. "Klassifizierung von Hedge-Fonds durch das k-means Clustering von Self-Organizing Maps: eine renditebasierte Analyse zur Selbsteinstufungsgüte und Stiländerungsproblematik
    [Classifying Hedge Funds    ," MPRA Paper 16939, University Library of Munich, Germany. [Downloadable!]
  4. Ravi Jagannathan & Alexey Malakhov & Dmitry Novikov, 2006. "Do Hot Hands Exist Among Hedge Fund Managers? An Empirical Evaluation," NBER Working Papers 12015, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Tobias Adrian, 2004. "Inference, arbitrage, and asset price volatility," Staff Reports 187, Federal Reserve Bank of New York. [Downloadable!]
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  6. Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2005. "Systemic Risk and Hedge Funds," NBER Working Papers 11200, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    • Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2007. "Systemic Risk and Hedge Funds," NBER Chapters, in: The Risks of Financial Institutions, pages 235-338 National Bureau of Economic Research, Inc. [Downloadable!]
  7. Zhenyu Wang & Xiaoyan Zhang, 2006. "Empirical evaluation of asset pricing models: arbitrage and pricing errors over contingent claims," Staff Reports 265, Federal Reserve Bank of New York. [Downloadable!]
  8. Antonio Diez de los Rios & René Garcia, 2006. "Assessing and Valuing the Non-Linear Structure of Hedge Fund Returns," Working Papers 06-31, Bank of Canada. [Downloadable!]
  9. Arjen Siegmann & André Lucas, 2002. "Explaining Hedge Fund Investment Styles by Loss Aversion," Tinbergen Institute Discussion Papers 02-046/2, Tinbergen Institute. [Downloadable!]
  10. Boyson, Nicole M. & Stahel, Christof W. & Stulz, Rene M., 2006. "Is There Hedge Fund Contagion?," Working Paper Series 2006-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  11. Geetesh Bhardwaj & Gary B. Gorton & K. Geert Rouwenhorst, 2008. "Fooling Some of the People All of the Time: The Inefficient Performance and Persistence of Commodity Trading Advisors," NBER Working Papers 14424, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Tobias Adrian & Markus K. Brunnermeier, 2008. "CoVaR," Staff Reports 348, Federal Reserve Bank of New York. [Downloadable!]
  13. Menzie D. Chinn & Hiro Ito, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," NBER Working Papers 11370, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Joseph Chen & Samuel Hanson & Harrison Hong & Jeremy C. Stein, 2008. "Do Hedge Funds Profit From Mutual-Fund Distress?," NBER Working Papers 13786, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Nicole M. Boyson & Christof W. Stahel & Rene M. Stulz, 2006. "Is There Hedge Fund Contagion?," NBER Working Papers 12090, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. repec:att:wimass:192054 is not listed on IDEAS
  17. Szabolcs Blazsek & Anna Downarowicz, 2008. "Regime switching models of hedge fund returns," Faculty Working Papers 12/08, School of Economics and Business Administration, University of Navarra. [Downloadable!]
  18. Boyson, Nicole & Stahel, Christof & Stulz, Rene, 2008. "Is There Hedge Fund Contagion," Working Papers 08-2, University of Pennsylvania, Wharton School, Weiss Center. [Downloadable!]
  19. Boyson, Nicole M. & Stahel, Christof W. & Stulz, Rene, 2008. "Hedge Fund Contagion and Liquidity," Working Paper Series 2008-8, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  20. Gur Huberman & Zhenyu Wang, 2005. "Arbitrage pricing theory," Staff Reports 216, Federal Reserve Bank of New York. [Downloadable!]
  21. Yong Chen & Wayne Ferson & Helen Peters, 2009. "Measuring the Timing Ability and Performance of Bond Mutual Funds," NBER Working Papers 15318, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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