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Passive Hedge Fund Replication – Beyond the Linear Case
Author(s) -
Amenc Noël,
Martellini Lionel,
Meyfredi JeanChristophe,
Ziemann Volker
Publication year - 2010
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2008.00448.x
Subject(s) - replication (statistics) , sample (material) , hedge fund , computer science , econometrics , power (physics) , business , economics , finance , mathematics , statistics , chemistry , chromatography , physics , quantum mechanics
In this paper we extend Hasanhodzic and Lo (2007) by assessing the out‐of‐sample performance of various non‐linear and conditional hedge fund replication models. We find that going beyond the linear case does not necessarily enhance the replication power. On the other hand, we find that selecting factors on the basis on an economic analysis allows for a substantial improvement in out‐of‐sample replication quality, whatever the underlying form of the factor model. Overall, we confirm the findings in Hasanhodzic and Lo (2007) that the performance of the replicating strategies is systematically inferior to that of the actual hedge funds.