Hedge Fund Return Predictability Under the Magnifying Glass
69 Pages Posted: 1 Aug 2010 Last revised: 23 Jun 2022
There are 2 versions of this paper
Hedge Fund Return Predictability Under the Magnifying Glass
Hedge Fund Return Predictability Under the Magnifying Glass
Date Written: February 8, 2012
Abstract
This paper develops a unified approach to comprehensively analyze 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
Suggested Citation: Suggested Citation
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