341 – Risk Analysis for Financial Applications
Bayesian Modeling of Hedge Fund Return Characteristics
Sponsor: Section on Risk Analysis
Keywords: Hedge fund, Fund of hedge funds, Bayesian, Markov Chain Monte Carlo, MCMC
Weiren Chang, PhD, CFA
JP Morgan
The objective of this work is to show the richer inference capabilities of the Bayesian framework and its applications to the financial services industry. Parametric and nonparametric methods were used to analyze returns characteristics of a representative fund of hedge funds (FoHF). Regression models were used to capture market factor sensitivities of the FoHF. Multiple Bayesian models were proposed; results by Markov Chain Monte Carlo simulations were compared and discussed. Actual market data and hedge fund returns were used in this study.