Abstract
Factors obtained both from the principal component analysis and from option strategies may account for the performance due to the dynamic trading style of the hedge funds. While the former approach may offer a more flexible representation of the myriad of strategies pursued by the hedge fund managers, the latter is better interpretable in financial terms and more suitable for out of sample applications. The two methodologies are compared with regard to the explanatory power of the style analysis, the indication of the funds with the most dynamic trading strategies, the valuation of the managers' performance and the assessment of the portfolios' risk exposures. Both approaches offer useful, even though not always convergent, insights concerning the peculiarities of the hedge funds' dynamic trading. As such, they may serve as complementary, rather than alternative, tools to detect the risk- return profile of the alternative investment vehicles.