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Nonlinear hedge fund index clones?

Author

Listed:
  • Mikhail Walden

    (SuperEd, Melbourne, VIC, Australia; Monash Business School, Monash University, Australia)

  • Paul Lajbcygier

    (Monash Business School, Monash University, Clayton, VIC, Australia)

Abstract

Cloning hedge fund indexes circumvents the many challenges associated with direct hedge fund investment. Theoretically, hedge fund indexes could have nonlinear exposures to the economic risk factors that drive their returns and may require nonlinear clones. By using flexible statistical models, we enable the choice between linear and nonlinear clones. We demonstrate that for certain hedge fund styles, nonlinear index clones are crucial for high fidelity replication. Nonlinear clones both facilitate economic insights to cloning and enhance the best linear clones. JEL classification: G10, G23, C15

Suggested Citation

  • Mikhail Walden & Paul Lajbcygier, 2023. "Nonlinear hedge fund index clones?," Australian Journal of Management, Australian School of Business, vol. 48(1), pages 147-170, February.
    • Handle: RePEc:sae:ausman:v:48:y:2023:i:1:p:147-170
    DOI: 10.1177/03128962221102184
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    More about this item

    Keywords

    Generalized additive models; hedge funds; investments; nonlinearities;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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