Abstract
This study compares the relative importance of thirteen attributes in explaining the cross-sectional variations in the returns of hedge funds, using a large sample from the TASS database covering the 1989–2005 period. We use a simple characteristic-based model of return decomposition, which has never before been applied to hedge funds. The characteristic factors are estimated using cross-sectional dummy-variable regressions. Their importance is found to be time-varying. We find that diversification across styles matters, but that it could be improved significantly by also diversifying across other characteristics, mainly including performance, volatility and fee structure.
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