Theq-factor and the Fama and French asset pricing models: hedge fund evidence

Abstract

Purpose The purpose of this paper is to test the new Fama and French (2015) five-factor model relying on a thorough sample of hedge fund strategies drawn from the Barclay’s Global hedge fund database. Design/methodology/approach The authors use a stepwise regression to identify the factors of the q-factor model which are relevant for the hedge fund strategy analysis. Doing so, the authors account for the Fung and Hsieh seven factors which prove very useful in the explanation of the hedge fund strategies. The authors introduce interaction terms to depict any interaction of the traditional Fama and French factors with the factors associated with the q-factor model. The authors also examine the dynamic dimensions of the risk-taking behavior of hedge funds using a BEKK procedure and the Kalman filter algorithm. Findings The results show that hedge funds seem to prefer stocks of firms with a high investment-to-assets ratio (low conservative minus aggressive (CMA)), on the one hand, and weak firms’ stocks (low robust minus weak (RMW)), on the other hand. This combination is not associated with the conventional properties of growth stocks – i.e., low high minus low (HML) stocks – which are related to firms which invest more (low CMA) and which are more profitable (high RMW). Finally, small minus big (SMB) interacts more with RMW while HML is more correlated with CMA. The conditional correlations between SMB and CMA, on the one hand, and HML and RMW, on the other hand, are less tight and may change sign over time. Originality/value To the best of the authors’ knowledge, the authors are the first to cast the new Fama and French five-factor model in a hedge fund setting which account for the Fung and Hsieh option-like trading strategies. This approach allows the authors to better understand hedge fund strategies because q-factors are useful to study the dynamic behavior of hedge funds.

Is Human Capital the Sixth Factor? Evidence from US Data

“…Concurrently, Fama & French (2015) proposed a fivefactor model by adding profitability and investment factors to the FF three-factor model, which performs poorly because of its inability to capture the low average returns on small stocks. Inaddition, Fama & French (2017); Gregoriou, Racicot, & Théoret (2016); and Racicot & Rentz (2016) confirms the failure of the FF five-factor asset pricing model in asset return predictability.…”

Hedge Fund Performance during and after the Crisis: A Comparative Analysis of Strategies 2007–2017

“…Their findings suggest that hedge funds have a significant exposure to the Fama and French three-factor model and Carhart's four-factor model. More recently, Gregoriou et al (2016) analysed hedge funds' returns and cross-sectional dispersion, using the Fama and French (1993) model, as well as Hsieh (1997, 2001) factors.…”

Nexus Between Equity Pricing Models and Equity Price Fragility: Empirical Insights From Pakistan

“…These reasons explain traditional pricing factors and behavioral aspects i-e confidence and optimism in equity pricing or return determination, extending herding behavior and disposition effect in a rational market. Herding behavior is a psychological attitude among equity holders following similar investing or speculating patterns in equity funds within the same set of markets, portfolios, or groups and is found present in the Asian context (Gregoriou et al, 2016). It is less common in the Indian national stock market.…”

“…It is less common in the Indian national stock market. Herding behavior in Karachi stock exchange was conditional because equity investors in K.S.E are price-conscious in the short-term in line with pride and regret graph line building following a dimension named as disposition effect (Gregoriou et al, 2016). However, disposition effect and herd behavior constructing equity investor's sentiments have diverse causal association with P.S.E volatility, affecting downside risk in long run (Chakroun and Hmaied, 2019) shuffles assets pricing indicators performance (Ahmed et al, 2019) drives market trading in non-fundamental side resulting extensively changing equity holding ownership (Afroz et al, 2020;Barua et al, 2020;Dai and Yin, 2020;Nwankwoala et al, 2020;Gao et al, 2021) and (Xiang and Qu, 2020).…”