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Do Hedge Funds’ Exposures to Risk Factors Predict Their Future Returns?

66 Pages Posted: 18 Feb 2010 Last revised: 27 Feb 2012

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Stephen J. Brown

New York University - Stern School of Business

Mustafa Onur Caglayan

Ozyegin University

Date Written: October 26, 2010

Abstract

This paper investigates hedge funds’ exposures to various financial and macroeconomic risk factors through alternative measures of factor betas and examines their performance in predicting the cross-sectional variation in hedge fund returns. Both parametric and nonparametric tests indicate a significantly positive (negative) link between default premium beta (inflation beta) and future hedge fund returns. The results are robust across different subsample periods and states of the economy, and after controlling for market, size, book-to-market, and momentum factors as well as the trend-following factors in stocks, short-term interest rates, currencies, bonds, and commodities. The paper also provides macro and micro level explanations of our findings.

Keywords: Hedge Funds, Return Predictability, Risk Factors

JEL Classification: G10, G11, C13

Suggested Citation

Bali, Turan G. and Brown, Stephen J. and Caglayan, Mustafa Onur, Do Hedge Funds’ Exposures to Risk Factors Predict Their Future Returns? (October 26, 2010). Available at SSRN: https://ssrn.com/abstract=1553911 or http://dx.doi.org/10.2139/ssrn.1553911

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

Stephen J. Brown

New York University - Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0306 (Phone)
212-995-4233 (Fax)

Mustafa Onur Caglayan

Ozyegin University ( email )

Nisantepe Mahallesi Orman Sokak
No:34-36 Alemdag Cekmekoy
Istanbul, 34794
Turkey
+90-216-564-9518 (Phone)

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