I am currently trying to make the best of quarantine by getting familiar with Stata by working on a little project. As the title states, I want to compare yearly alphas of Hedge Fund strategies.
I would like to do two things:
Finding the alpha of all (i.e. not individual) Hedge Funds over the last 25 years
Finding the yearly alpha of different Hedge Fund strategies (e.g. Emerging Market or Fixed Income arb.)
To do so I am using the Fung-Hsieh 7-factor model. It is basically a linear factor model designed for the Hedge Fund universe, where the dependent var. is the after-fee excess return and the independent vars. are the seven factors and the intercept is alpha. My data is an unbalanced panel set where each fund is identified by its ID and observations are monthly. Leaving me with around 600,000 observations in total. Now on to my problem(s): To find the "overall" alpha I have tried various regressions.
reg return EquityMarket Size BondMarket CreditSpread PTFSBD PTFSFX PTFSCOM, vce(hc3)
xtreg return EquityMarket Size BondMarket CreditSpread PTFSBD PTFSFX PTFSCOM, fe vce(robust)
While the alpha and coeff. of the factors are roughly in line with the literature my adj. R2 is substantially lower. In the literature, depending on the timeframe, adj. R2 are generally above 0.5 mine is around 0.1. The only regression that has delivered a somewhat higher R2 (0.28) is:
bysort IDD: asreg return EquityMarket Size BondMarket CreditSpread PTFSBD PTFSFX PTFSCOM
asreg is a user-written command, the results are the same when I regress on the fund level using the normal reg command and then average the R2 of the individual funds.
For the yearly alpha exercise, I have also tried various approaches, e.g.
by year, sort : regress return EquityMarket Size BondMarket CreditSpread PTFSBD PTFSFX PTFSCOM, vce(hc3)
where R2 ranges from 0.04 to 0.2.
So in short, I am certain that there is something fundamentally wrong with my approach. I have already checked my monthly factors, so I am confident the issue is not caused by wrongly calculated monthly factors. I am aware that there are more complex models/approaches out there which I am planning to tackle once I have the basics sorted out.
As this is my first post I hope I did not make any mistakes while writing up this question and would also like to thank you all in advance.
References: Factor Model: https://faculty.fuqua.duke.edu/~dah7/HFRFData.htm
Tables 7&8 is roughly what I am trying to reproduce:
Roger G. Ibbotson, Peng Chen & Kevin X. Zhu (2011) The ABCs of Hedge Funds: Alphas, Betas, and Costs, Financial Analysts Journal, 67:1, 15-25, DOI: 10.2469/ faj.v67.n1.6