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Multi-Index Evaluation of Alternative Assets Funds. Time Lagged Effects and Linear Factors Capturing Non-linear Effects

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  • Scorbureanu, Alexandrina Ioana

Abstract

Investments such as venture capital, buyouts, distressed debt or assimilated, have the peculiarity of being difficult to value due to their illiquid nature on the market. The lack of transparency is determined by the market value being either determined infrequently or estimated through an "appraisal" process. Both methods of evaluation lead to the "smoothing" of returns, implying that the reported performance metrics are biased: in particular, the estimated volatility is lower than the true volatility of the investment. We propose and test two multi-index methods to evaluate performance of mezzanine, distressed debt and hedge funds, aiming at overcoming the existing gaps in the current traditional portfolio analysis. The proposed models are able to capture non-linear market effects - asset class exposure and style factor model - with the advantage of remaining in the simple framework of the linear regression analysis. We discuss the results obtained and compare them with the outcomes of a traditional regression analysis. The paper is organized as follows: section 1 provides additional arguments to support the current methodology; section 2 presents the two types of methods used in the analysis and introduces the extensions to these models to incorporate market-lagged effects; section 3 describes the data used for the analysis, namely series of returns for three funds: mezzanine, distressed debt, and hedge fund; section 4 provides interpretation and comparisons of the results obtained when using different specifications of the first method based on the asset class exposure models whereas section 5 discusses the results obtained from different specifications of the style factor model. Finally, section 6 summarizes the main achievements.

Suggested Citation

  • Scorbureanu, Alexandrina Ioana, 2013. "Multi-Index Evaluation of Alternative Assets Funds. Time Lagged Effects and Linear Factors Capturing Non-linear Effects," MPRA Paper 50208, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:50208
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    References listed on IDEAS

    as
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    2. Elton, Edwin J, et al, 1993. "Efficiency with Costly Information: A Reinterpretation of Evidence from Managed Portfolios," The Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 1-22.
    3. François-Serge LHABITANT, 2001. "Assessing Market Risk for Hedge Funds Portfolios," FAME Research Paper Series rp24, International Center for Financial Asset Management and Engineering.
    4. Grinblatt, Mark & Titman, Sheridan & Wermers, Russ, 1995. "Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior," American Economic Review, American Economic Association, vol. 85(5), pages 1088-1105, December.
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    More about this item

    Keywords

    performance analysis; multi-benchmark; hedge funds; distressed debt; mezzanine;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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