Get access

Hedge Fund Risk Dynamics: Implications for Performance Appraisal




    Search for more papers by this author
    • The Owen Graduate School of Management, Vanderbilt University. The authors thank seminar participants at the Commodity Futures Trading Commission, Emory University, Indiana University, Vanderbilt University, and the 2008 American Finance Association annual meeting for helpful suggestions. Cliff Ball, Bruce Cooil, Chris Kirby, Andrew Patton, and Jay Shanken provided useful comments. Research support from the Managed Funds Association is gratefully acknowledged.


Accurate appraisal of hedge fund performance must recognize the freedom with which managers shift asset classes, strategies, and leverage in response to changing market conditions and arbitrage opportunities. The standard measure of performance is the abnormal return defined by a hedge fund's exposure to risk factors. If exposures are assumed constant when, in fact, they vary through time, estimated abnormal returns may be incorrect. We employ an optimal changepoint regression that allows risk exposures to shift, and illustrate the impact on performance appraisal using a sample of live and dead funds during the period January 1994 through December 2005.