Standard tests for persistence in hedge fund performance are not consistent with investment practices because they ignore performance reporting delay, overlook fund selection standards of institutional investors, and often use portfolios with too many funds. This paper introduces a set of tests...

Ratios that indicate the statistical significance of a fund’s alpha typically appraise its performance. A growing literature suggests that even in the absence of any ability to predict returns, holding options positions on the benchmark assets or trading frequently can significantly enhance...

This paper analyzes optimal investment decisions, in the presence of non-redundant hedge funds, for investors with constant relative risk aversion. Factor regression models with optionlike risk factors and no-arbitrage principles are used to identify and estimate the market price of hedge fund...

We investigate behavior of optimal hedge fund leverage in a fund that has a compensation contract with high-water mark and hurdle rate provisions. A risk neutral fund manager can continuously reallocate assets while she obtains management and performance fees in discrete time moments. We find...

While the use of dynamic factor models for Hedge Fund Replication (HFR) has proven to be superior to standard OLS methodologies (e.g., Roncalli and Weisang, 2009a,b), current factor selection methodology in these dynamic settings by means of direct PCA-based estimation of the factors (e.g.,...

Good market timing skills can be an important factor contributing to hedge funds' out-performance. In this paper we use a unique semi-parametric panel data model capable of providing consistent short period estimates of the return correlations with three market factors for a sample of Long/Short...

Hedge fund managers are subject to several non-linear incentives: (a) performance fee options (call); (b) equity investor's redemption options (put); (c) prime broker contracts allowing for forced deleverage (put). The interaction of these option-like incentives affects optimal leverage ex-ante,...

This article addresses the problem of portfolio construction in the context of efficient hedge fund investments replication. We propose a modification to the standard à la Sharpe “style analysis” by introducing a constraint on the asset weights 1-norm and 2-norm. This constraint regularizes...

One can consider the concept of market neutrality as having quot;breadthquot; and quot;depthquot;: quot;Breadthquot; reflects the number of market risks to which the hedge fund is neutral, while quot;depthquot; reflects the quot;completenessquot; of the neutrality of the fund to market risks. We...