Hedge Fund Style Analysis, Is an Index-Based Approach Viable?

Sammanfattning: This thesis aims to open the Pandora’s Box of hedge fund styles through an index-based style analysis. This information asymmetry is due to both less strict disclosure requirements and inherent nature of hedge funds. We employ a multiple unconditional linear regression model wherein 23 Swedish hedge funds are regressed on 10 style indices. In addition to the increased interest in hedge funds and their performance drivers, our unique approach with regressing return on return motivates this study. The results show that this is indeed a viable approach to identify an individual hedge fund’s investment style. The explanatory power (adjusted R2) is 0.24, which in the case of hedge fund research is relatively high. Our model indicates some discrepancy between regressed result and alleged styles. Given the assumption that investment style has an impact on hedge fund performance, an investor will benefit from index-based style analysis.