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Directional and non-directional risk exposures in Hedge Fund returns

Listed author(s):
  • Marie Lambert


    (Luxembourg School of Finance, University of Luxembourg)

  • George Hübner


    (HEC Management School, University of Liège)

  • Marie Lambert


    (HEC Montreal.)

This paper re-examines the ability of the factor model approach to evaluate the performance of hedge funds. The analysis incorporates traditional asset based factors as well as an array of new and previously studied option based factors and instrumental variables. As hedge fund returns are not normally distributed, higher order moments play a significant role in maximizing the investors’ expected utility. As a result, hedge fund performance evaluation should assign a premium to higher order asset co-moments of hedge fund returns with the aggregate market in order to consistently capture the sources of hedge fund returns. We provide evidence that there is still much information embedded in option prices, particularly in the implied higher moments, which has not previously been exploited. These new option based factors increase the explanatory power of the models across all the hedge fund strategies.

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Paper provided by Luxembourg School of Finance, University of Luxembourg in its series LSF Research Working Paper Series with number 09-06.

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Date of creation: 2009
Handle: RePEc:crf:wpaper:09-06
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