The Fund of Hedge Fund Selection Puzzle: A Pragmatic Approach to Identify the X-Factor

Serge Darolles, Mathieu Vaissié: We use the regime switching approach introduced in Pelletier (2006), and adapted by Giamouridis and Vrontos (2007) to the context of hedge fund portfolios, to design a new tactical style allocation factor.

Author(s):

Serge Darolles

DRM-Université Paris Dauphine

Mathieu Vaissie

Head of Research, Ginjer AMResearch Associate, EDHEC-Risk Institute

We then propose to leverage on this factor to identify fund of hedge fund managers who turn out to be good at capturing the upside while controlling for the downside risk. By so doing, we provide investors with a pragmatic though robust approach to address the fund of hedge fund selection puzzle. We show in the empirical analysis that funds of hedge funds showing the strongest loading on our factor outperform their peers materially. Very interestingly, we find persistence for both the highest and the lowest loadings. In the end, 11% of the funds of hedge funds in our sample systematically appear in the 1st tier.

Type: Working paper
Date: le 14/04/2014
Research Cluster : Finance

See Also

EDHEC-Risk Instute paper on value in sovereign bond markets accepted by the Journal of Fixed Income
News
- 12-09-2019
We are pleased to enclose an EDHEC-Risk Institute research article published in the...
EDHEC Faculty welcomes Oxford professor Renée B. Adams for a reseach seminar
News
- 11-09-2019
On September 12, 2019, EDHEC faculty will be delighted to welcome Oxford professor...
Riccardo Rebonato will unveil the results of the 12th EDHEC-Risk European ETF & Smart Beta Survey on Sept 23 in London
News
- 03-09-2019
Riccardo Rebonato, Professor of Finance, EDHEC Business School, EDHEC-Risk Institute,...
Launch of the
News
- 03-09-2019
EDHEC Business School and Scientific Beta have announced the launch of the “Advanced...