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Keywords:

  • hedge funds;
  • replication;
  • conditional factor model
  • G10

Abstract

In this paper we extendHasanhodzic and Lo (2007)by assessing the out-of-sample performance of various non-linear and conditional hedge fund replication models. We find that going beyond the linear case does not necessarily enhance the replication power. On the other hand, we find that selecting factors on the basis on an economic analysis allows for a substantial improvement in out-of-sample replication quality, whatever the underlying form of the factor model. Overall, we confirm the findings inHasanhodzic and Lo (2007)that the performance of the replicating strategies is systematically inferior to that of the actual hedge funds.