RT Journal Article
SR Electronic
T1 Hedge Fund Benchmarking: <em>Equity Correlation</em>
               <br/>
               <em>Regimes and Alpha</em>
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP 24
OP 47
DO 10.3905/jai.2013.15.4.024
VO 15
IS 4
A1 Jerome B. Baesel
A1 José F. González-Heres
A1 Ping Chen
A1 Steven S. Shin
YR 2013
UL https://pm-research.com/content/15/4/24.abstract
AB The authors analyze the effect of realized cross-sectional correlations of the S&amp;P 500 on hedge fund alpha by proposing a unified model that extends the Fama–French five-factor model by adding a momentum factor and a dichotomous cross-sectional equity-market correlation factor. The use of dichotomous variables, to isolate cross-sectional equity-market correlation regimes, reveals factor exposures that would otherwise not be detectable using a continuous-time period analysis. The model achieves a robust forecasting efficacy rate. They find strong empirical evidence of idiosyncratic manager-based investment decisions (e.g., security selection, sector rotation, leveraging skills) during low correlation regimes, as evidenced by materially higher alpha, with the converse effect during high correlation regimes. The proposed model can be used as a practical benchmarking tool for hedge fund allocators, particularly when applied to equity-oriented hedge fund strategies.TOPICS: Real assets/alternative investments/private equity, factor-based models, manager selection, statistical methods