Quantitative Topics in Hedge Fund Investing

Abstract

There are five current topics in hedge fund investing examined here. First is that investors should use multifactor models with observable market factors when they attempt to separate alpha from beta. Second, it is important to test for the positive serial correlation in hedge fund returns that remains a pervasive problem. Third, there are some difficulties in applying academic techniques to portfolio construction, but several pragmatic solutions may be able to overcome them. Fourth, manager selection may be more important than strategy allocation for hedge fund investing. Finally, negatively skewed returns have implications for the construction of a portfolio of hedge funds.