Bridge over ocean
1 September 2002 Financial Analysts Journal Volume 58, Issue 5

Asset-Based Style Factors for Hedge Funds

  1. William Fung
  2. David A. Hsieh

Asset-based style factors link returns of hedge fund strategies to observed market prices. They provide explicit and unambiguous descriptions of hedge fund strategies that reveal the nature and quantity of risk. Asset-based style factors are key inputs for portfolio construction and for benchmarking hedge fund performance on a risk-adjusted basis. We used previously developed models to construct asset-based style factors and demonstrate that one model correctly predicted the return behavior of trend-following strategies during out-of-sample periods—in particular, during stressful market conditions like those of September 2001.

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