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Title: Evaluating hedge fund performance when models are misspecified Authors:  Olivier Scaillet - University of Geneva and Swiss Finance Institute (Switzerland) [presenting]
Abstract: Evaluating the performance of hedge funds is challenging because any benchmark model is unlikely to capture their numerous strategies. To assess the level of misspecification among models, we develop a formal comparison approach. This comparison sharpens performance evaluation by improving the separation between pure alphas and factor premium exposures. We find that using the standard benchmark models is problematic because they deliver the same performance as the simplest possible benchmark, the CAPM. In contrast, a parsimonious model based on economically-motivated factors (including carry, time-series momentum, and variance) tracks some alternative hedge fund strategies and achieves a sizable performance reduction relative to the CAPM.