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Quantitative Selection of Long-Short Hedge Funds

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Author Info

  • Kaifeng CHEN

    ()
    (HEC-University of Lausanne and FAME)

  • Alexander PASSOW

    ()
    (GOTTEX and FAME)

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    Abstract

    We develop a quantitative model to select hedge funds in the long-short equity sector. The selection strategy is verified on a survivorship-bias-free hedge fund database, from January 1990 to September 2002. We focus on the hedge funds acting exclusively in the U.S. market. We identify Fama-French factors and GSCI as the risk factors. Based on the evidence that many hedge funds do not exhibit persistent performance, we believe that persistent alpha is not generated based on publicly available information and opportunistic changes of exposure with respect to the risk factors. Instead we expect moderate exposure funds to be those who establish investment decisions based on special information or proprietary research. A hedge fund selection strategy is introduced and checked with out-of-sample data. A simulation of hedge funds from 1927 to 2002 is conducted. The funds selected according to our strategy demonstrate superior performance persistently.

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    Bibliographic Info

    Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp94.

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    Date of creation: Jul 2003
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    Handle: RePEc:fam:rpseri:rp94

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    Related research

    Keywords: Hedge Fund; Long Short Strategy; Fama-French; Commodity; Performance Persistence; Skewness; Selection;

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