Date of Graduation


Document Type


Degree Name

Doctor of Philosophy in Business Administration (PhD)

Degree Level





Alexey Malakhov

Committee Member

Wayne Y. Lee

Second Committee Member

Timothy J. Yeager

Third Committee Member

Kangzhen Xie


This dissertation is comprised of three essays which focus on hedge fund performance and derivative hedging. The first essay uses ETF returns as proxies for tradable risk factors in hedge fund performance evaluation and identifies contemporaneously relevant risk factors from the entire universe of ETFs. The model provides more informative estimates of alpha and beta coefficients for predicting hedge fund out-of-sample performance compared with other widely used hedge fund factor models. Portfolios of top alpha hedge funds selected by the model generate statistically significant out-of-sample performance that is substantially higher compared with portfolios selected by other models. In addition, the beta-weighted clone portfolios exhibit substantially higher out-of-sample correlations with underlying hedge funds than clone portfolios formed using alternative models.

The second essay shows that only hedge funds whose returns are driven by beta management of exposures to latent risk factors could be successfully replicated. I develop a methodology for creating a portfolio of ETFs that replicates risk factor exposures taken by successful beta active cloneable hedge funds. The methodology allows any investor to access active factor strategies employed by hedge funds. It could be interpreted as cloning beta exposures of the best beta active hedge funds, delivering outstanding long-term risk-adjusted performance. The active factor ETF portfolio only requires annual rebalancing, and is constructed with a transparent algorithmic approach, which conforms to a definition of a smart beta strategy.

The third essay investigates the use of derivatives among firms. A careful study of hedging motives and hedging effectiveness is critical to understanding the financial impact of derivative use by firms. I examine the use of commodity derivatives by oil and gas producers and show that, on average, these firms report gains from their derivative positions. The profits from derivatives, particularly non-hedge profits, are positively associated with the extent of hedging that is classified as market timing activities.