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Hedge Fund Performance Evaluation under the Stochastic Discount Factor Framework

Published online by Cambridge University Press:  12 April 2016

Haitao Li,
Yuewu Xu and
Xiaoyan Zhang
Haitao Li
Affiliation:
htli@ckgsb.edu.cn, Cheung Kong Graduate School of Business, Beijing 100738, China
Yuewu Xu
Affiliation:
yuxu@fordham.edu, Fordham University, Gabelli School of Business, New York, NY 10023
Xiaoyan Zhang*
Affiliation:
zhang654@purdue.edu, Purdue University, Krannert School of Management, West Lafayette, IN 47906.
*
*Corresponding author: zhang654@purdue.edu
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Abstract

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We study hedge fund performance evaluation under the stochastic discount factor framework of Farnsworth, Ferson, Jackson, and Todd (FFJT). To accommodate dynamic trading strategies and derivatives used by hedge funds, we extend FFJT’s approach by considering models with option and time-averaged risk factors and incorporating option returns in model estimation. A wide range of models yield similar conclusions on the performance of simulated long/short equity hedge funds. We apply these models to 2,315 actual long/short equity funds from the Lipper TASS database and find that a small portion of these funds can outperform the market.

Information

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 1 , February 2016, pp. 231 - 257
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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