Laurent Barras, Professor within the Department of Finance at the University of Luxembourg, received the best asset pricing paper award for his work “Evaluating Hedge Fund Performance when Models are Misspecified,” co-authored with David Ardia, Patrick Gargliardini and Olivier Scaillet. The prize was awarded during the 38th International Conference of the French Finance Association (AFFI) held in Saint-Malo, France in May 2022.
In the paper, Prof. Barras and co-authors develop a novel approach to formally compare hedge fund models. Sharpening performance evaluation by improving the separation between pure alphas and factor exposures, the researchers find that the standard models deliver the same performance as the simplest benchmark—the CAPM or Capital Asset Pricing Model. In contrast, a parsimonious model based on economically motivated factors (including carry, time-series momentum, and variance) tracks alternative hedge fund strategies and achieves a sizable performance reduction relative to the CAPM.
The paper can be downloaded on the SSRN database.