A Dynamic Style Analysis Model for Hedge Funds

Abstract

In this paper, we develop a dynamic style analysis model designed to identify hedge fund risk structures. Through the estimation of implied risk exposures, it reconciles the concepts of dynamics and non-linearity. We show that our model, coupled with specific estimation and selection methods, deliver significant results in identifying complex and non-linear risk exposures, such as straddle-like exposures implied by trend following strategies. Applied at the individual fund level, our dynamic model exhibit superior explanatory power in comparison to Asset-Based Style Factor models proposed in previous literature. The dynamic risk structures estimated are in line with the investment strategies that are specific to the various hedge fund styles.