Application of multifactor models to assess the profitability of active investment strategies of hedge funds

Aim. The work aimed to analyze single-factor and multifactor models for assessing the profitability of hedge funds with an emphasis on emerging markets.

Objectives. The work seeks to test the CAPM (Capital Asset Pricing Model) and the Fama–French five-factor model on global hedge fund indices; highlight the key regional features of emerging markets (Asia, Latin America, Eastern Europe); as well as construct an extended factor model taking into account the features of emerging markets.

Methods. The study employed the analysis methods of calculating return-to-risk ratio coefficients (e.g., the Sharpe ratio), the index method (grouping several assets/funds similar in certain characteristics into one index), and constructing single-factor and multi-factor models.

Results. The study demonstrates that the use of multi-factor models for assessing the profitability of active investment strategies of hedge funds in most cases outperforms single-factor CAPM models. Empirical results confirm that the inclusion of additional factors increases significantly the explanatory power of the models, reaching in some cases 75%–90% of the explained variance compared to 50%–70% for CAPM.

Conclusions. The practical significance of the work consists in providing tools for a more accurate assessment of the effectiveness of active investment strategies of hedge funds, which allows investors to make informed decisions, and managers can optimize their strategies. The results for the emerging markets strategy are of particular interest to Russian investors in the context of sanctions from Western countries and limited access to developed markets and can also be used by management companies when making investment decisions related to foreign assets in the relevant regions.

1. Boasson V., Boasson E. Risk and returns of hedge funds investment strategies. Investment Management and Financial Innovations. 2011;8(2): 110-121. URL: https://www.researchgate.net/publication/287067041_Risk_and_returns_of_hedge_funds_investment_strategies (accessed on 09.06.2025).

2. Lomonosov A.A. Prospects for an active investment strategy using the example of hedge funds. Vestnik Instituta ekonomiki Rossiiskoi akademii nauk = Bulletin of the Institute of Economics of the Russian Academy of Sciences. 2024;(3):104-135. (In Russ.). http://doi. org/10.52180/2073-6487_2024_3_104_135

3. Tange I. Multivariate time-series analysis of hedge fund indices. Cass Business School, City University London, 2014. URL: https://www.academia.edu/23672883/Multivariate_Time_Series_Analysis_of_Hedge_Fund_Indices (accessed on: 09.06.2025).

4. Sharpe W.F. Mutual fund performance. The Journal of Business. 1996;39(1):119-138. URL: https://finance.martinsewell.com/fund-performance/Sharpe1966.pdf (accessed on 09.06.2025).

5. Fama E.F., French K.R. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics. 1993;33(1):3-56. https://doi.org/10.1016/0304-405X(93)90023-5

6. Carhart M.M. On persistence in mutual fund performance. The Journal of Finance. 1997;52(1):57-82. https://doi.org/10.1111/j.1540-6261.1997.tb03808.x

7. Fama E.F., French K.R. A five-factor asset pricing model. Journal of Financial Economics. 2015;116(1):1-22. https://doi.org/10.1016/j.jfineco.2014.10.010