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Anomalies as New Hedge Fund Factors

Author

Listed:
  • Chen, Yong
  • Li, Sophia Zhengzi
  • Tang, Yushan
  • Zhou, Guofu

Abstract

We identify a parsimonious set of factors from a large pool of candidates for explaining hedge fund returns, ranging from equity market, anomaly, and trend-following factors to macroeconomic factors. The resulting 9-factor model, including five anomaly factors, outperforms existing hedge fund models both in sample and out of sample, with a significant reduction in alphas while showing substantial cross sectional performance heterogeneity. Further analysis based on fund holdings confirms the model’s ability to capture returns from arbitrage trading. Overall, the anomaly factors help quantify hedge fund strategies and risk exposures and improve fund performance evaluation.

Suggested Citation

  • Chen, Yong & Li, Sophia Zhengzi & Tang, Yushan & Zhou, Guofu, 2025. "Anomalies as New Hedge Fund Factors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 60(8), pages 3660-3693, December.
    • Handle: RePEc:cup:jfinqa:v:60:y:2025:i:8:p:3660-3693_2
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