Hedge Fund Return Predictability Under the Magnifying Glass
Hebrew University of Jerusalem
McGill University - Desautels Faculty of Management
Imperial College Business School; CEPR (Centre for Economic Policy Research); University of Oxford, Oxford-Man Institute of Quantitative Finance
March 25, 2012
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
This paper develops a unified approach to comprehensively analyse individual hedge fund return predictability, both in- and out-of-sample. In-sample, we find that variation in hedge fund performance across changing market conditions is widespread and economically significant. The predictability pattern is consistent with economic rationale, and largely reflects differences in key hedge fund characteristics, such as leverage or capacity constraints. Out-of-sample, we show that a simple strategy that combines the funds' return forecasts obtained from individual predictors delivers superior performance. We exploit this simplicity to highlight the drivers of this performance, and find that in- and out-of-sample predictability are closely related.
Keywords: Hedge Fund Performance, Return Predictability, Combination Forecasts
JEL Classification: G11, G23, C12
Date posted: March 26, 2012
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