Description Usage Arguments Details Value Note Author(s) References See Also
Function which performs the screening of a universe of returns, and compute the Alpha outperformance ratio
1 | alphaScreening(X, factors = NULL, control = list())
|
X |
matrix (TxN) of T returns for the N funds. |
factors |
matrix (TxK) of T returns for the K factors. |
control |
control parameters (see *Details*). |
The alpha measure (Treynor and Black 1973, Carhart 1997, Fung and Hsieh 2004) is one industry standard for measuring the absolute risk adjusted performance of hedge funds. We propose to complement the alpha measure with the fund's alpha outperformance ratio, defined as the percentage number of funds that have a significantly lower alpha. In a pairwise testing framework, a fund can have a significantly higher alpha because of luck. We correct for this by applying the false discovery rate approach by (Storey 2002).
The methodology proceeds as follows:
compute all pairwise tests of alpha differences. This means
that for a universe of N funds, we perform N*(N-1)/2 tests. The algorithm has been parallelized and the computational
burden can be slip across several cores. The number of cores can be defined in control
, see below.
for each fund, the false discovery rate approach by Storey (2002) is used to determine the proportions of over, equal, and underperfoming funds, in terms of alpha, in the database.
The argument control
is a list that can supply any of the following components:
hac
heteroscedastic-autocorrelation consistent standard errors. Default: hac = FALSE
.
minObs
minimum number of concordant observations to compute the ratios. Default: minObs = 10
.
minObsPi
minimum number of observations for computing the p-values). Default: minObsPi = 1
.
nCore
number of cores used to perform the screeing. Default: nCore = 1
.
lambda
threshold value to compute pi0. Default: lambda = NULL
, i.e. data driven choice.
A list with the following components:
n
: vector (of length N) of number of non-NA
observations.
npeer
: vector (of length N) of number of available peers.
alpha
: vector (of length N) of unconditional alpha.
dalpha
: matrix (of size NxN) of alpha differences.
pval
: matrix (of size N \times N) of p-values of test for alpha differences.
lambda
: vector (of length N) of lambda values.
pizero
: vector (of length N) of probability of equal performance.
pipos
: vector (of length N) of probability of outperformance performance.
pineg
: vector (of length N) of probability of underperformance performance.
Further details on the methdology with an application to the hedge fund industry is given in in Ardia and Boudt (2012). The file ‘ThePeerPerformanceOfHedgeFunds.txt’ in the ‘/doc’ package's folder allows the reprodution of the steps followed in the article. See also the presentation by Kris Boudt at the R/Finance conference 2012 at http://www.rinfinance.com.
Application of the false discovery rate approach applied to the mutual fund industry has been presented in Barras, Scaillet and Wermers (2010).
Currently, the hac asymptotic and studentized circular block bootstrap presented in Ledoit and Wolf (2008) are not supported by
the alphaScreening
function.
Please cite the package in publications. Use citation("PeerPerformance")
.
David Ardia and Kris Boudt.
Ardia, D., Boudt, K. (2015). Testing equality of modified Sharpe ratios Finance Research Letters 13, pp.97–104.
Ardia, D., Boudt, K. (2015). The Peer Performance of Hedge Funds. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2000901
Barras, L., Scaillet, O., Wermers, R. (2010). False discoveries in mutual fund performance: Measuring luck in estimated alphas. Journal of Finance 5, pp.179–216.
Carhart, M. (1997). On persistence in mutual fund performance. Journal of Finance 52, pp.57–82.
Fama, E., French, K. (2010). Luck versus skill in the cross-section of mutual fund returns. Journal of Finance 65, pp.1915–1947.
Fung, W., Hsieh, D. (2004). Hedge fund benchmarks: A risk based approach. Financial Analysts Journal 60, pp.65–80.
Storey, J. (2002). A direct approach to false discovery rates. Journal of the Royal Statistical Society B 64, pp.479–498.
Treynor, J. L., Black, F. (1973). How to use security analysis to improve portfolio selection. Journal of Business 46 1, pp.66–86.
sharpeScreening
and msharpeScreening
.
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