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Capturing hedge fund risk factor exposures: Hedge fund return replication with ETFs
Author(s) -
Duanmu Jun,
Li Yongjia,
Malakhov Alexey
Publication year - 2020
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12221
Subject(s) - returns based style analysis , hedge fund , business , fund of funds , open end fund , performance fee , alternative beta , sample (material) , replication (statistics) , econometrics , actuarial science , fund administration , finance , economics , mathematics , institutional investor , statistics , corporate governance , chemistry , chromatography , market liquidity
We develop a new factor selection methodology of spanning the space of hedge fund risk factors with all available exchange traded funds (ETFs). We demonstrate the efficacy of the methodology with out‐of‐sample individual hedge fund return replication by ETF clone portfolios. This is consistent with our interpretation of ETF returns as proxies to risk factors driving hedge fund returns. We further consider portfolios of “cloneable” and “noncloneable” hedge funds, defined as top and bottom in‐sample R 2 matches, and demonstrate that our ETF clone portfolios slightly outperform cloneable hedge funds out of sample.