Factor Analysis of Hedge Funds: The Case of Och-Ziff

Here’s a quick multi-factor analysis of Och-Ziff Overseas II, more precisely of its last 77 monthly NAVs (including May 2010). There are a few interesting take-aways:

• 99% of OZ’s performance, per the Adjusted R-Squared, can be explained by this factor model, which is obviously almost perfect.
• The factors explaining the performance in this model are the S&P 500, the MSCI World index, the Leveraged Loan index, and the Credit Suisse High Yield Bond index.
• The sign of the terms for the S&P 500 and the Leveraged Loan index is negative (with high t-stats. Actually, the t-stats leave no doubt on the significance of the parameters, since they’re all, in absolute terms, above 6.) That is, a significant part of OZ’s returns comes from being SHORT the S&P500, or rather, more probably, by hedging HY bond and global equity positions with shorts/puts on the S&P500.
• Whatever the best explanation for the negative S&P coefficient, this factor analysis indicates that OZ certainly is not a simple levered play on any of these markets.

Note that we cannot draw conclusions from the magnitude of the coefficients since, in this analysis, the NAV of the fund has been normalized to 1 at inception.

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.994780933
R Square 0.989589104
Adjusted R Square 0.989018644
Standard Error 0.019640803
Observations 78

ANOVA
df SS MS F Significance F
Regression 4 2.676752148 0.669188037 1734.721144 1.61407E-71
Residual 73 0.028160565 0.000385761
Total 77 2.704912713

Coefficients Std Error t Stat P-value
Intercept 0.918831919 0.028415423 32.33567607 5.221E-45
MSCI World 0.000880636 9.31751E-05 9.451410452 2.66496E-14
Lev Loan index -0.007563448 0.00059902 -12.6263688 4.89766E-20
CS HY Index 0.001589215 .2593E-05 37.31167533 2.72932E-49
S&P 500 -0.000828656 0.000126406 -6.55550518 6.87152E-09