Resumen de Evaluating hedge funds with pooled benchmarks
Michael S. O'Doherty, N.E. Savin, Ashish Tiwari
The evaluation of hedge fund performance is challenging given the flexible nature of hedge funds’ strategies and their lack of operational transparency. As a result, inference about skill is inevitably contaminated by the error in the benchmark model. To address this concern, we propose a model pooling approach to develop a fund-specific benchmark obtained by pooling a set of diverse attribution models. The weights assigned to the individual models in the pool are based on the log score criterion, an information-theoretic measure of the conditional performance of a model. We illustrate the advantages of a pooled benchmark over alternative approaches, including the Fung and Hsieh [Fung W, Hsieh DA (2004) Hedge fund benchmarks: A risk-based approach. Financial Analysts J. 60:65–80] model, stepwise regression methods, and style-adjusted methods in the contexts of a real-time investment strategy, hedge fund replication, and fund failure prediction.
