Assessing and valuing the nonlinear structure of hedge fund returns
Several studies have put forward that hedge fund returns exhibit a nonlinear relationship with equity market returns, captured either through constructed portfolios of traded options or piece-wise linear regressions. This paper provides a statistical methodology to unveil such nonlinear features with respect to returns on benchmark risk portfolios. We estimate a portfolio of options that best approximates the returns of a given hedge fund, account for this search in the statistical testing of the nonlinearity, and provide a reliable test for a positive valuation of the fund. We find that not all fund categories exhibit significant nonlinearities, and that only a few strategies provide significant value to investors. Our methodology helps identify individual funds that provide value in an otherwise poorly performing category. Copyright (C) 2010 John Wiley & Sons, Ltd.
Volume (Year): 26 (2011)
Issue (Month): 2 (March)
|Contact details of provider:|| Web page: http://www.interscience.wiley.com/jpages/0883-7252/|
|Order Information:|| Web: http://www3.interscience.wiley.com/jcatalog/subscribe.jsp?issn=0883-7252 Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hansen, Bruce E, 1996.
"Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis,"
Econometric Society, vol. 64(2), pages 413-30, March.
- Hansen, B.E., 1991. "Inference when a Nuisance Parameter is Not Identified Under the Null Hypothesis," RCER Working Papers 296, University of Rochester - Center for Economic Research (RCER).
- Tom Doan, . "TAR: RATS procedure to estimate a threshold autoregression, tests for threshold effect," Statistical Software Components RTS00209, Boston College Department of Economics.
- Tom Doan, . "RATS programs to replicate Hansen's threshold estimation and testing results," Statistical Software Components RTZ00091, Boston College Department of Economics.
- Glosten, L. R. & Jagannathan, R., 1994.
"A contingent claim approach to performance evaluation,"
Journal of Empirical Finance,
Elsevier, vol. 1(2), pages 133-160, January.
- Lawrence R. Glosten & Ravi Jagannathan, 1993. "A contingent claim approach to performance evaluation," Staff Report 159, Federal Reserve Bank of Minneapolis.
- Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2007.
"Systemic Risk and Hedge Funds,"
in: The Risks of Financial Institutions, pages 235-338
National Bureau of Economic Research, Inc.
- Merton, Robert C, 1981. "On Market Timing and Investment Performance. I. An Equilibrium Theory of Value for Market Forecasts," The Journal of Business, University of Chicago Press, vol. 54(3), pages 363-406, July.
- Andrew J. Patton, 2009.
"Are "Market Neutral" Hedge Funds Really Market Neutral?,"
Review of Financial Studies,
Society for Financial Studies, vol. 22(7), pages 2295-2330, July.
- Andrew J. Patton, 2004. "Are "market neutral" hedge funds really market neutral?," LSE Research Online Documents on Economics 24819, London School of Economics and Political Science, LSE Library.
- Andrews, Donald W K & Ploberger, Werner, 1994.
"Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative,"
Econometric Society, vol. 62(6), pages 1383-1414, November.
- Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
- Tom Doan, . "APBREAKTEST: RATS procedure to implement Andrews-Ploberger Structural Break Test," Statistical Software Components RTS00006, Boston College Department of Economics.
- Tom Doan, . "REGHBREAK: RATS procedure to perform structural break test with bootstrapped p-values," Statistical Software Components RTS00176, Boston College Department of Economics.
- Tom Doan, . "APGRADIENTTEST: RATS procedure to perform Andrews-Ploberger Structural Break Test for GARCH/Maximum Likelihood," Statistical Software Components RTS00007, Boston College Department of Economics.
- Posthuma, Nolke & Sluis, Pieter Jelle van der, 2003. "A Reality Check on Hedge Funds Returns," Serie Research Memoranda 0017, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
- Admati, Anat R, et al, 1986. " On Timing and Selectivity," Journal of Finance, American Finance Association, vol. 41(3), pages 715-30, July.
- Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
- Mark Mitchell, 2001. "Characteristics of Risk and Return in Risk Arbitrage," Journal of Finance, American Finance Association, vol. 56(6), pages 2135-2175, December.
- Dybvig, Philip H & Ross, Stephen A, 1985. " Differential Information and Performance Measurement Using a Security Market Line," Journal of Finance, American Finance Association, vol. 40(2), pages 383-99, June.
- Henriksson, Roy D, 1984. "Market Timing and Mutual Fund Performance: An Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 57(1), pages 73-96, January.
- Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
- Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06.
- Fung, William & Hsieh, David A, 2001. "The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 313-41.
When requesting a correction, please mention this item's handle: RePEc:wly:japmet:v:26:y:2011:i:2:p:193-212. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.