Hedge Fund Performance Evaluation under the Stochastic Discount Factor Framework. (12th April 2016)

• Record Type: Journal Article
• Authors: Li, Haitao; Xu, Yuewu; Zhang, Xiaoyan
• Is Part Of: Journal of financial and quantitative analysis. Volume 51:Number 1(2016)
• Page Start: 231
• Page End: 257
• Publication Date: 2016-04-12
• Subjects: Finance -- Periodicals; Investments -- Mathematics -- Periodicals; 332.05
• DOI: 10.1017/S0022109016000120
• Languages: English
• ISSNs: 0022-1090

Abstract

Abstract: 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.