Hedge Fund Modelling and Analysis

CHAPTER 4 Statistical Analysis

In order for hedge fund managers to make informed decisions with regard to their investments it is essential that several key statistical analyses are performed. This will usually involve analysing a time series of periodic hedge fund returns to ascertain relevant statistical properties of the data in order to make critical inference about the characteristics and performance of the hedge fund. Many visual and mathematical methods are available that allow hedge fund managers to understand the underlying data structure and identify potential anomalies that may need further investigation whilst also allowing managers to make better informed decisions. It is also important that a serious investor or hedge fund manager have a working knowledge of many of the probability and statistical concepts encountered in the industry so as to be confident and knowledgeable when explaining and discussing their hedge fund investment strategies to potential investors.

Chapter 4 covers the main concepts, principles and techniques employed in the statistical analysis of hedge fund returns. Both visual and theoretical methods are presented which show how to extract and interpret the informational content and underlying characteristics within a periodic time series of hedge fund returns. However, before delving into those issues we will briefly discuss the basis of the class structure we are going to build upon as we go through each chapter.

4.1 The Stats Class

In ...