66 Pages Posted: 18 Feb 2010 Last revised: 27 Feb 2012
Date Written: October 26, 2010
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: 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
By Bing Liang