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MSCI Fund Model Research Notes

categories: Risk Management Analytics, Factor and Risk Modeling, Alternatives, Equities, Fixed Income, Multi-Asset Class, SHEPARD Peter, LIU Yang, YANG Luping, general

This note describes a new method for estimating the risk exposures of hedge funds and mutual funds when complete holdings are unavailable. Like MSCI’s previous fund models, the Fund Model enables returns-based analysis of funds together with holdings-based analysis of other portfolio components. The new methodology extends traditional returns-based style analysis to incorporate other holdings-based information, reduce noise, and overcome distortions from turnover and the smoothing of illiquid fund returns. The new techniques robustly combine all available sources of information, including the fund returns, the behavior of the peer group, priors on the fund’s exposures and tilts, and other available information, such as the asset allocation or sector weights. The new approach results in expanded coverage and improved forecast accuracy.

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