A Time Varying Performance Evaluation of Hedge Fund Strategies through Aggregation

Bankers, Markets and Investors, Vol. 129, pp. 38-56
Monica Billio,
Lorenzo Frattarolo,
Loriana Pelizzon
Program Area:
Financial Intermediation, Systemic Risk Lab

We evaluate the time varying behavior of the extra performance of single hedge funds using a Markov Switching model. We calculate the hedge fund performance adjusted by the Fung and Hsieh 7 factors and use this measure as the dependent variable of a Markov Switching model. With this methodology we obtain individual time varying alphas that are then aggregated to compute time varying alphas for the whole industry and single hedge funds strategies. Our analysis shows that profitability changes dramatically trough time, across categories and is related to the level of competition of the hedge fund market.

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