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This paper reviews the data and methodological difficulties in applying conventional models of constructing asset-class indices to hedge funds and argues against the conventional approach. Extending the work of Fung and Hsieh (2002a) on asset-based style (ABS) factors, an APT-like model of hedge fund returns with dynamic risk factor coefficients is proposed. For diversified hedge fund portfolios, the seven ABS style factors explain up to 90% of monthly return variations. As ABS factors aredoi:10.2469/faj.v60.n5.2657 fatcat:sijdy5azpnfpjhxfz5tai2u5iy