ABSTRACT
After learning about the exacting aspects of empirical hedge fund research, people turn to one of the most challenging topics in portfolio management. This chapter provides a thorough overview of the essential aspects of manager selection including quantitative and qualitative analysis. It demonstrates that a gap exists between standard academic methodologies and industry needs and then proposes a robust and implementable framework for evaluating manager selection techniques. The chapter also describes factors and factor selection techniques for performance evaluation of hedge funds. It is widely accepted in academic literature to evaluate performance of investments relative to systematic factors because the finance theory suggests that only systematic sources of risk are compensated with higher expected returns. The Fung-Hsieh seven-factor model has been the primary benchmark model for evaluating hedge fund performance since it was proposed in the 2004 paper Hedge Fund Benchmarks: A Risk-based Approach by William Fung and David Hsieh.
