Beverly Chandler, Opalesque London: A new paper from the Newedge research chair on advanced modelling for alternative investments at EDHEC-Risk evaluates hedge fund performance through a new non linear risk adjustment of returns.
'Robust assessment of Hedge Fund Performance through Nonparametric Discounting’ by Caio Almeida and René Garcia prices exactly the usual set
of risk factors considered in the hedge fund
literature. The pair writes: "This nonlinear risk adjustment
goes beyond the usual linear regression
methodology used in many hedge fund
performance papers, including nonlinear
exposures based on option-like features."
The new approach proposed in this paper is designed to overcome
two limitations of the linear
methodology: it captures the nonlinear
exposure of a hedge fund strategy to several
risk factors, and it is not limited to nonlinear
shapes resembling standard option payoff
patterns. "We apply this methodology to
various hedge fund indices as well as to
individual hedge funds, considering a set of
risk factors including equities, bonds, credit,
currencies and commodities" the authors write.
The main result that emerges from their analysis is that
exposure to higher-moment risks on
the various factors matters. "Analysing the
performance of HFRI indices on primary
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