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.
DRM-Université Paris Dauphine
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.
|Research Cluster :||Finance|