K.U.Leuven - Faculty of Economics and Applied Economics
DTEW - AFI_0622 pages:1-27
In this paper we study the investment dynamics employed by hedge fund managers.Using daily data for nine investable hedge fund strategies, we use a rolling-overregression technique, which allows us to capture the time-variability present in the different strategies of hedge fund managers. The results indicate that the inclusion oftime-variability is important as the risk exposures change significantly over time. Our results show no evidence of traditional alpha out-performance within a multifactorframework. Given this inability to generate consistent alpha returns, we also analyze the performance data relative to the factor specific beta risk. To this end, we replicatestatic hedge fund returns and compare them to the actual hedge fund returns. We conclude that most hedge fund returns beat the replicated static trading strategy. Thissuggests that particular hedge funds add alpha return through the skill of timing alternative beta risk.