Hedge Fund Analysis — Reading the Multi-Factor Tea Leaves

During the last few years, there has been growing interest in the use of factor models for performing risk and exposure analysis of hedge funds. While interpreting directional and spread related factors in this context is fairly straightforward, interpreting non-linear options exposures often is not. Given the variety of activities that can produce options exposures, the interpretation of multi-factor output in this regard can be more of an art than a science. This paper explores the variety of hedge fund manager activities that can drive options exposures in multi-factor analysis.