Working Paper: NBER ID: w9111
Authors: Arik Ben Dor; Ravi Jagannathan
Abstract: We provide an introduction to the use of return based style analysis of Sharpe (1992) in practice. We demonstrate the importance of selecting the right style benchmarks and how the use of inappropriate style benchmarks may lead to wrong conclusions. When style analysis is applied to sector oriented funds such as healthcare, precious metals, energy, technology, etc., the set of benchmarks should include sector or industry indexes. Following Glosten and Jagannathan (1994), Fung and Hsieh (2001), and Agarwal and Naik (2001), we show how to analyze the investment style of hedge fund managers by including the returns on selected option based strategies as style benchmarks. In the examples we consider, return based style analysis provides insights not available through commonly used 'peer' evaluation alone.
Keywords: No keywords provided
JEL Codes: G10; G14; G20; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| benchmark selection (C52) | performance assessment (O22) |
| sector-oriented benchmarks (L25) | accurate evaluation of sector funds (G23) |
| benchmark selection (C52) | perceived quality of fund management (G23) |
| return-based style analysis (C87) | insights beyond peer evaluation (C92) |
| inappropriate benchmarks (C52) | incorrect inferences about fund performance (G41) |