Hedge Fund Replication using Liquid ETFs and Regression Analysis

Abstract

Hedge fund replication involves the use of common factors or liquid Exchange Traded Funds (ETFs) in order to replicate the risk-return profile of common hedge fund strategies, including Convertible Arbitrage, Long/Short Equity, Global Marco, and Event Driven, among others. The benefits of replication are that traders and risk managers can replicate the risk-return profile of various hedge fund strategies or portfolios with increased transparency and lower costs, including lower management and performance fees. The added liquidity of ETFs also allow traders to avoid common hedge fund lock-up periods. To model various hedge fund strategies, the authors utilize historical hedge fund return data, along with regression analysis to model the returns of common trading and hedging strategies. Various input data selection procedures, such as those focusing on the best returns in each strategy category, or using the individual funds with the highest Sharpe ratios, are also tested to determine their impact on the replication performance, as well as the risk-return flexibility of the replication modeling.

Department(s)

Engineering Management and Systems Engineering

Keywords and Phrases

Exchange Traded Funds; Financial Risk and Return; Hedge Fund Replication; Regression

International Standard Book Number (ISBN)

978-098376243-0

Document Type

Article - Conference proceedings

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 2024 The Institute of Industrial Engineers, All rights reserved.

Publication Date

01 Jan 2014

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