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New paper from EDHEC-Risk proposes new method for assessing hedge fund performance

Monday, July 16, 2012

Beverly Chandler, Opalesque London: A new paper, produced as part of the Newedge research chair at the EDHEC-Risk Institute on "Advanced Modelling for Alternative Investments", examines the performance of hedge funds through a non-linear risk adjustment of returns.

Robust Assessment of Hedge Fund Performance through Nonparametric Discounting is authored by Caio Almeida, holder of a PhD in Electrical Engineering from Catholic University in Rio, and a post-doctorate degree from the Department of Mathematics at Stanford University and René Garcia, Professor of Finance at EDHEC Business School and the Academic Director of the EDHEC-Risk Institute PhD in Finance programme.

This paper evaluates the performance of hedge funds through a new nonlinear risk adjustment of returns. The pair writes: "The risk adjustment is such that it prices exactly the usual set of risk factors considered in the hedge fund literature. This nonlinear risk adjustment goes beyond the usual linear regression methodology used in many hedge fund performance papers, including nonlinear exposures based on option-like features".

The approach proposed in this paper aims to overcomes two important limitations of the linear methodology: it captures the nonlinear exposure of a hedge fund strategy to several risk fact......................

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