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Research Insight - Understanding Hedge Funds in a Factor-Based World - September 2014

The recent outperformance of global equities has some investors wondering whether they should reduce their allocations to hedge funds. The announcement from CalPERS to end its hedge fund program cited low returns and high fees, but is that the whole picture?  Sorting out sources of hedge fund performance is particularly important given the recent focus of many institutional investors on factor-based investing.  In this Research Insight, we identify the role that factor exposures play in the accounting of hedge fund returns, and we also show how MSCI models and diagnostic tools can be used to add transparency to the management of a hedge fund program.