Hedge Funds, Managerial Skill, and Macroeconomic Variables
Hebrew University of Jerusalem
Imperial College Business School; University of Oxford, Oxford-Man Institute of Quantitative Finance
Narayan Y. Naik
London Business School - Institute of Finance and Accounting
Singapore Management University - School of Business
December 29, 2009
AFA 2008 New Orleans Meetings Paper
This paper evaluates hedge fund performance through portfolio strategies that incorporate predictability based on macroeconomic variables. Incorporating predictability substantially improves out-of-sample performance for the entire universe of hedge funds as well as for various investment styles. While we also allow for predictability in fund risk loadings and benchmark returns, the major source of investment profitability is predictability in managerial skills. In particular, long-only strategies that incorporate predictability in managerial skills outperform their Fung and Hsieh (2004) benchmarks by over 17 percent per year. The economic value of predictability obtains for different rebalancing horizons and alternative benchmark models. It is also robust to adjustments for backfill bias, incubation bias, illiquidity, fund termination, and style composition.
Number of Pages in PDF File: 47
Keywords: hedge funds, predictability, managerial skills, macroeconomic variables
JEL Classification: G11, G12, G14, G23working papers series
Date posted: March 22, 2007 ; Last revised: February 23, 2010
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