Hedge Fund Return-Based Style Estimation: A Review on Comparison Hedge Fund Indices

Posted: 22 May 2019

See all articles by Thomas Schneeweis

Thomas Schneeweis

University of Massachusetts Amherst - Isenberg School of Management

Hossein B. Kazemi

University of Massachusetts at Amherst - Isenberg School of Management

Edward Szado

Providence College

Date Written: July 1, 2012

Abstract

The data dependency of empirical financial research is of common concern to both academics and practitioners. This is especially true for hedge funds since no one single commonly accepted database exists and since many of the databases may hold different sets of reporting managers. Each database uses current reporting managers as the basis for the construction of hedge fund indices and these index returns reflect the characteristics of the funds reporting to the relevant database. However, unlike historical returns derived from current databases, historical returns from most major hedge fund indices do not contain backfill or survivor bias. At the same time, performance characteristics may differ between indices since each index is constructed based on a different set of rules (e.g., equal weighted, asset weighted, etc.). In this analysis we conduct a series of empirical tests, similar to those previously conducted in academic studies. In this analysis we use only those hedge fund indices which reflect the average returns of the entire set of reporting managers; that is, the indices representing overall industry returns. Results indicate that return based style analyses, often used as a basis for hedge fund analysis, are impacted both by the period of analysis as well as the hedge fund index used. Moreover, results indicate that the addition of variables beyond those designed to capture underlying equity, interest rate, and credit risk have little impact on explanatory power of these hedge fund universe indices beyond a very low level of statistical significance.

Keywords: Hedge Funds, Database, Bias, TASS, CISDM, HFR

Suggested Citation

Schneeweis, Thomas and Kazemi, Hossein B. and Szado, Edward, Hedge Fund Return-Based Style Estimation: A Review on Comparison Hedge Fund Indices (July 1, 2012). https://doi.org/10.3905/jai.2012.15.2.024 , Available at SSRN: https://ssrn.com/abstract=2205885 or http://dx.doi.org/10.2139/ssrn.2205885

Thomas Schneeweis

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States
413-545-5641 (Phone)
413-545-3858 (Fax)

Hossein B. Kazemi

University of Massachusetts at Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Edward Szado (Contact Author)

Providence College ( email )

United States

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