Hedge Fund Performance

Abstract

Assessing the risk-adjusted performance of hedge funds is a complex issue in finance, due to the particular nature of these financial vehicles, which translates into non-Gaussian return distributions. Indeed, hedge funds usually exhibit non-linear option-like exposures to standard asset classes and, as a result, this chapter illustrates the adaptation of classical performance measures to the special features of this asset class. Moreover, advanced measures are object of examination. Their main target is to describe the dynamics of hedge funds based on a linear factor-based return generating process. The underlying idea of these models is to “transfer” the non-linearity of hedge funds onto ad hoc explanatory risk factors representing the main strategies used by the managers of hedge funds. The chapter provides an evaluation, both theoretical and empirical, of the main methodological approaches used in the literature to hedge fund performance analysis using the following style factors: latent factors, peer groups, embedded options, and asset-based style factors.