Hedge Funds: The Good, the Bad, and the Lucky Conference Paper

abstract

• We develop an estimation approach based on a modified expectation-maximization (EM) algorithm and a mixture of normal distributions associated with skill groups to assess performance in hedge funds. By allowing luck to affect both skilled and unskilled funds, we estimate the number of skill groups, the fraction of funds from each group, and the mean and variability of skill within each group. For each individual fund, we propose a performance measure combining the funds estimated alpha with the cross-sectional distribution of fund skill. In out-of-sample tests, an investment strategy using our performance measure outperforms those using estimated alpha and t-statistic.

authors

• Chen, Yong

published proceedings

• JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS

author list (cited authors)

• Chen, Y., Cliff, M., & Zhao, H.

citation count

• 39

complete list of authors

• Chen, Yong||Cliff, Michael||Zhao, Haibei

publication date

• June 2017

publisher

• Cambridge University Press (CUP)  Publisher

published in

• Journal of Financial and Quantitative Analysis  Journal

keywords

• 35 Commerce, Management, Tourism And Services
• 3502 Banking, Finance And Investment

Digital Object Identifier (DOI)

• 10.1017/S0022109017000217

start page

• 1081

end page

• 1109

volume

• 52

issue

• 3

URL

• http://dx.doi.org/10.1017/s0022109017000217