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Isaac Newton Institute for Mathematical Sciences

Risk Management of Hedge Funds

A Multi-factor approach to hedge fund risk modelling

Author: Stan Beckers (Barclays Global Investors)


Multi-factor risk modelling is well established within the equity world. With its theoretical foundations in Arbitrage Pricing Theory, the practical implementation has either relied upon investment practice (fundamental factor models) or statistical data analysis (factor analysis). Academic research so far has amply proven that systematic risk factors are also present in hedge funds. However the identification of these factors has been hampered by - lack of reliable and high frequency return data - a lack of transparency of the underlying investment strategy - the widespread presence of derivative based (sub)-strategies that are harder to capture In our talk we will briefly review which 'factors' have so far been identified within the various hedge fund strategies. We will review their (in and out of sample) explanatory power and draw inferences for hedge fund portfolio construction.