Two steps methodology
by Alexander Cherny, Raphael Douady and Stanislav Molchanov, 2008
We propose a methodology for estimating hedge fund risk, which consists of two steps: rst, regressing the return on non-linear functions of each single factor and second, merging together the obtained estimates taking into account the dependence between different factors. This enables us to use as a lever the fact that we have more information on factors than on hedge funds. As a by-product, we obtain a new approach to non-linear hedge fund replication.