Forecasting the Performance of Hedge Fund Styles

56 Pages Posted: 22 Sep 2011 Last revised: 16 Apr 2012

See all articles by Jose Olmo

Jose Olmo

Universidad de Zaragoza; University of Southampton

Marcos Sanso-Navarro

Universidad de Zaragoza

Date Written: March 12, 2012

Abstract

This article predicts the relative performance of hedge fund investment styles one period ahead using time-varying conditional stochastic dominance tests. These tests allow the construction of dynamic trading strategies based on nonparametric density forecasts of hedge fund returns. During the recent financial turmoil, our tests predict a superior performance of the Global Macro investment style compared to the other `Directional Traders' strategies. The Dedicated Short Bias investment style is, on the other hand, stochastically dominated by the other directional styles. These results are confirmed by simple nonparametric tests constructed from the realized excess returns. Further, by exploiting the cross-validation method for optimal bandwidth parameter selection, we find out which factors have predictive power for the density of hedge fund returns. We observe that different factors have forecasting power for different regions of the returns distribution and, more importantly, Fung and Hsieh factors have power not only for describing the risk premium but also for density forecasting if appropriately exploited.

Keywords: Conditional density estimation, hedge fund styles, nonparametric methods, portfolio performance, stochastic dominance tests

JEL Classification: C1, C2, G1

Suggested Citation

Olmo, Jose and Sanso-Navarro, Marcos, Forecasting the Performance of Hedge Fund Styles (March 12, 2012). Available at SSRN: https://ssrn.com/abstract=1932225 or http://dx.doi.org/10.2139/ssrn.1932225

Jose Olmo (Contact Author)

Universidad de Zaragoza ( email )

Gran Via, 2
50005 Zaragoza, Zaragoza 50005
Spain

University of Southampton ( email )

Southampton
United Kingdom

Marcos Sanso-Navarro

Universidad de Zaragoza ( email )

Facultad de Economía y Empresa
Departamento de Análisis Económico
Zaragoza, 50005
Spain
+34 876 554 629 (Phone)

HOME PAGE: http://personal.unizar.es/marcossn

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