Time-Varying Style Analysis and the Leverage of Funds of Hedge Funds

This paper models hedge fund exposure to risk factors and examines time-varying performance of hedge funds. From existing models such as asset-based style (ABS)-factor model, standard asset class (SAC)-factor model, and four-factor model, we extract the best six factors for each hedge fund portfolio by investment strategy. Then, we find combinations of risk factors that explain most of the variance in performance of each hedge fund portfolio based on investment strategy. The results show instability of coefficients in the performance attribution regression. Incorporating a time-varying factor exposure feature would be the best way to measure hedge fund performance. Furthermore, the optimal models with fewer factors exhibit greater explanatory power than existing models. Using rolling regressions, our customized investment strategy model shows how hedge funds are sensitive to risk factors according to market conditions.

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Assessing the Performance of Funds of Hedge Funds

SSRN Electronic Journal ◽

10.2139/ssrn.1929097 ◽

2011 ◽

Author(s):

Benoit Dewaele ◽

Hugues Pirotte ◽

Nils Tuchschmid ◽

Erik Wallerstein

Keyword(s):

Hedge Funds ◽

Funds Of Hedge Funds

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Liquidity Transformation and Financial Fragility: Evidence from Funds of Hedge Funds

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109018001369 ◽

2018 ◽

Vol 54 (6) ◽

pp. 2355-2381 ◽

Cited By ~ 8

Author(s):

Vikas Agarwal ◽

George O. Aragon ◽

Zhen Shi

Keyword(s):

Hedge Funds ◽

Financial Fragility ◽

Funds Of Hedge Funds

We examine liquidity transformation by funds of hedge funds (FoFs) by developing a new measure, illiquidity gap, that captures the mismatch between the liquidity of their portfolios and the liquidity available to their investors. We find that higher liquidity transformation is driven by FoFs’ incentives to attract more capital and earn higher compensation. Greater liquidity transformation is associated with higher exposure to investor runs and worse performance during crisis periods. Finally, FoFs mitigate the risks associated with liquidity transformation by maintaining higher cash buffers.

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