Abstract

This paper is an extension of the work of Lawson and Schwartz (2018) which analyzes the risk-adjusted performance of hedge funds by employing a collection of four, five, seven, and eight-factor models. The purpose is to evaluate how well the top and bottom performing subset of hedge fund strategies have profited on known asset pricing anomalies during two unique time periods, 1994 to 2000 and 2001 to 2008. The bifurcation of the data into two distinct periods allows for a deeper exploration of the potential time-varying significance of estimated factor arbitrage. Our empirical testing suggests that both the top and bottom performing funds did utilize the asset growth anomaly to generate abnormal profits. Top performers tended to invest with a long emphasis on low asset growth, value firms while the bottom-five performing hedge fund strategies tested positive for a predilection towards going long small firms with low asset growth characteristics. Arguably, these outcomes probably align with the nature of the investment philosophy of each fund strategy. Interestingly, however, the time-varying significance of estimated coefficients for the value and returns momentum factors between the two distinct timeframes suggests either intentional or unintentional rotation between the use of available pricing anomalies and risk premiums.

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