Risk decomposition of hedge fund index

As the booming of hedge fund industry from 1990, more and more investors put their money into hedge fund. However, with the collapse of Long Term Capital Management and the debacle of Portus Alternative Asset Management, many investors realize that hedge fund does not seems so attractive since it has abnormal return distribution and extreme potential downside risk. What is the key driver of the risk of hedge fund? Based on economic viewpoint of hedge fund returns, we argue that the total risk of hedge fund can be decomposed into systematic risk component and unsystematic risk component using our regr ession model. We use Lower Partial Moment as a measurement of risk to implement our model and reveal the real structure of hedge fund risk components with respect to different target returns.