Statistics and Probability

Fung & Hsieh (1999) found that linear regression models were less successful at explaining the returns of hedge funds when compared to mutual funds. In order to overcome this, some subsequent research has focussed on using option strategies as explanatory variables with more success. Using your knowledge of the Trend Following and Risk Arbitrage strategies as well as the academic literature, discuss which option strategies best explain the returns of these two strategies and why this might be the case.

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