An Alternative Approach to Alternative Beta
AbstractHedge fund replication based on factor models is encountering growing interest. In this paper, we investigate the implications of substituting standard rolling windows regressions, which appear ad-hoc, with more efficient methodologies like the Kalman filter. We show that the copycats constructed this way offer risk-return profiles which share several characteristics with the ones posted by hedge funds indices: Sharpe ratios above buy-and-hold strategies on standard assets, moderate correlation with tandard assets, and limited drawdowns during equity downward trends. An interesting result is that the shortfall risk seems less important than with hedge fund indices and regressions-based trackers. We finally propose new breakdowns of hedge fund erformance into alpha, traditional beta, and alternative beta.
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Bibliographic InfoArticle provided by Capco Institute in its journal Journal of Financial Transformation.
Volume (Year): 24 (2008)
Issue (Month): ()
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hedge fund replication; alternative beta; Kalman filter;
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- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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- Sam Nasypbek & Scheherazade S Rehman, 2011. "Explaining the returns of active currency managers," BIS Papers chapters, in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 211-256 Bank for International Settlements.
- Roncalli, Thierry & Weisang, Guillaume, 2011.
"Tracking Problems, Hedge Fund Replication, and Alternative Beta,"
Journal of Financial Transformation,
Capco Institute, vol. 31, pages 19-29.
- Roncalli, Thierry & Weisang, Guillaume, 2008. "Tracking problems, hedge fund replication and alternative beta," MPRA Paper 37358, University Library of Munich, Germany.
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