Modelling - how to identify the sources of hedge funds' returns

academic paper

The primary financial model is the Capital Asset Pricing Model (CAPM), initiated by Sharpe in 1964. It is a single-factor model in which security prices are governed by their market risks and not their firm-specific risks. Based on a simple statistical regression framework using T historical returns:

Rit = ai + biRmt + eit

where Rit is the return on a given portfolio (or fund) i, ai is the abnormal performance of the portfolio (or fund) i, bi is the sensitivity of the portfolio (or fund) i and Rmt