Manager skills of long/short equity hedge funds : the factor model dependency

Abstract

Performance analysis of hedge funds has proven to be challenging in the past since these entities have the flexibility to choose between a wide variety of dynamic trading strategies without being compelled to report their holdings. That being said, using bootstrap procedures, some authors in the academic literature have succeeded in quantifying the proportion of funds which demonstrates persistent performance. Yet, these methodologies are based on an extensive range of multifactor models to estimate the performance of hedge funds. Four different models which seem particularly adapted to assess hedge fund returns will be replicated, with both buy-and-hold and optional factors incorporated. The research aims at demonstrating the potential bias and/or outperformance brought by some factor models used when defining hedge fund manager skills. Using robust bootstrap simulations, evidence was found that superior hedge fund performance cannot be explained by luck alone and that, regardless of the multifactor model used.