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A Time-Varying Performance Evaluation of Hedge Fund Strategies through Aggregation

Author

Listed:
  • Monica Billio

    (Ca' Foscari University of Venice)

  • Lorenzon Frattarolo

    (Ca' Foscari University of Venice, University Paris-1 Panthéon-Sorbonne)

  • Lauriana Pelizzon

    (Ca' Foscari University of Venice, Goethe-University Frankfurt Research Affiliate MIT Sloan, Laboratory for Financial Engineering)

Abstract

We evaluate the time varying behavior of the extra performance of single hedge funds using a Markov Switching model. We calculate the hedge fund performance adjusted by the Fung and Hsieh 7 factors and use this measure as the dependent variable of a Markov Switching model. With this methodology we obtain individual time varying alphas that are then aggregated to compute time varying alphas for the whole industry and single hedge funds strategies. Our analysis shows that profitability changes dramatically trough time, across categories and is related to the level of competition of the hedge fund market.

Suggested Citation

  • Monica Billio & Lorenzon Frattarolo & Lauriana Pelizzon, 2014. "A Time-Varying Performance Evaluation of Hedge Fund Strategies through Aggregation," Bankers, Markets & Investors, ESKA Publishing, issue 129, pages 40-58, March-Apr.
  • Handle: RePEc:rbq:journl:i:129:p:40-58
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    More about this item

    Keywords

    Extra performances; Hedge funds; Markov switching models; Financial crises;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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