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Title: Hedge funds : risk decomposition, replication and the disposition effect
Author: Amaxopoulos, Fotios
ISNI:       0000 0004 2702 5654
Awarding Body: Imperial College London
Current Institution: Imperial College London
Date of Award: 2011
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The purpose of this thesis is to contribute to the literature on hedge fund performance and risk analysis. The thesis is divided into three major chapters that apply novel factor model (Chapter 2) and return replication approaches (Chapter 3) as well as using hedge fund holdings information to examine the disposition effect (Chapter 4). Chapter 2 focuses on the implementation of an efficient Signal Processing technique called Independent Component Analysis, in order to try to identify the driving mechanisms of hedge fund returns. We propose a new algorithm to interpret economically the independent components derived by the data. We use a wide dataset of financial linear and non-linear factors and apply the classification given by the independent component factor models to form optimal portfolios of hedge funds. The results show that our approach outperforms the classic factor models for hedge funds in terms of explanatory power and statistical significance, both in and out of sample. Additionally the ICA model seems to outperform the other models in asset allocation and portfolio construction problems. In chapter 3 we use an effective classification algorithm called Support Vector Machines in order to classify and replicate hedge funds. We use hedge fund returns and exposures on the Fung and Hsieh factor model in order to classify the funds as the self declared strategies differ significantly in the majority of cases from the real one the funds follow. Then we replicate the hedge fund returns with the use of the Support Vector Regressions and we conduct: external replication using financial and economic factors that affect hedge fund returns. Finally in chapter 4 we examine whether hedge funds exhibit a disposition effect in equity markets that leads to under-reaction to news and return predictability. The tendency to hold losing investments too long and sell winning investments too soon has been documented for mutual funds and retail investors, but little is known about whether holdings of sophisticated institutional investors such as hedge funds exhibit such irrational behaviour. We examine the previously unexplored differences in the disposition effect and performance between hedge and mutual funds. Our results show that hedge funds' equity portfolio holdings are consistent with the disposition effect and lead to stronger predictability than that induced by mutual funds' disposition effect during the same sample period. A subsample analysis reveals that this is due to a relatively more pronounced moderation in the disposition-induced predictability in mutual fund holdings, which may, for example, be related to managers learning from their past suboptimal behaviour documented by earlier studies.
Supervisor: Kosowski, Robert ; Meade, Nigel Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral