Recent advances in explaining hedge fund returns:implicit factors and exposures

We survey articles covering how hedge fund returns are explained, using largely non-linear multifactor models that examine the non-linear pay-offs and exposures of hedge funds. We provide an integrated view of the implicit factor and statistical factor models that are largely able to explain the hedge fund return-generating process. We present their evolution through time by discussing pioneering studies that made a significant contribution to knowledge, and also recent innovative studies that examine hedge fund exposures using advanced econometric methods. This is the first review that analyzes very recent studies that explain a large part of hedge fund variation. We conclude by presenting some gaps for future research.