BTRM Working Paper Series, #9

Click BTRM_WP9_Jaafar_Hedge Funds.pdf link to view the file.

Hedge Fund Returns Replication

Jaafar Husain – Quant Analyst, Bank ABC 
10th October 2017 

In this article we will introduce an effective statistical approach to replicate hedge fund returns. The approach is based on a carefully designed stepwise regression procedure. The objectives of the regression procedure are to 1) identify the strategies and markets to which a hedge fund manager is exposed, and 2) to analyze the progression of these exposures over time. While a hedge fund manager will continually change their overall exposure to exploit market anomalies, we wouldn’t expect a manager who for many years traded in the long/short equity space to suddenly switch to the stressed equity space. The regression procedure is designed to capture such strategy drifts.