RT Journal Article
SR Electronic
T1 Dynamic Hedge Fund Exposures:
One Size Estimation Interval Doesn’t Fit All
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP 86
OP 117
DO 10.3905/jai.2013.16.1.086
VO 16
IS 1
A1 Brian T. Hayes
YR 2013
UL https://pm-research.com/content/16/1/86.abstract
AB Investors frequently use rolling regressions to estimate dynamic factor exposures. The estimation interval is an important parameter, but is often set unsystematically. The author studies interval selection through a model in which a fund’s factor exposure switches between high and low states, and investors track or clone this exposure with a rolling regression. The mean square error between the fund and clone depends on the fund’s exposure turnover and idiosyncratic risk, as well as the estimation interval. Lower idiosyncratic risk and higher turnover favor shorter intervals, but when turnover is sufficiently high, an expanding window is superior to fixed intervals. Consistent with the article’s model, expanding interval clones of some popular hedge fund indexes have smaller errors than those based on rolling intervals of any length.TOPICS: Real assets/alternative investments/private equity, analysis of individual factors/risk premia, statistical methods