How much fees could HFRI replication charge before falling below S&P Sharpe ratio?

1. How has DELTA done vs. HFRI_FW and S&P index? Compute the mean return,

volatility, Sharpe ratio, and correlations of DELTA with the indices, for the whole period

as well as two subperiods (2008-2009 and 2010-2011). What is the simple cumulative

return for DELTA and HFRI_FW and S&P index in the whole period from 2008 Oct to

2011 May? If you start with 1$ in each of these in beginning of Oct 2008, how much

money you will end up with in 2011 May?

 

2. Using a four-factor model that is expanded from Fama-French three-factor model by

adding a Momentum factor, please evaluate the performance of HFRI equity hedge total

return index and the DELTA strategy. Interpret your regression results. Do they

outperform? What are their exposures to market, size, value and momentum factor?

(Fama-French three-factor model data and momentum factor data are provided on

Canvas)

 

3. Using the data in Exhibit 3 of the case, construct a HFRI replication strategy using the

following indices: MSCI EM, MSCI EAFE, RUSSELL 2000, S&P 500, US TREASURY

2YR; US TREAUSRY 10 YR; CURRENCY. For every month from Jan 2003 to end of

2011, use previous 7-year monthly data to construct your replica strategy (7-year rolling

window). Please use Excel function LINEST. For instance, take Jan 2003, use all data

from Jan 1996 to Dec 2002 to run your regression, then take the coefficients to construct

replication strategy return for Jan 2003. For HFRI index, please use HFRI equity hedge

total return index.

a. Compare the mean, volatility, Sharpe ratio, of HFRI, S&P 500 index and the

replication strategy. Please compute the t-statistics for the mean.

 

b. How well does the replication strategy return correlate with HFRI?

 

c. Repeat the replication strategy using a smaller window (let’s all use 3-year rolling

window). Is there any improvement?

 

d. How much fees could HFRI replication charge before falling below S&P Sharpe ratio?

e. What are the benefits of such replication strategies and what are the potential risks?

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