Beta Active Hedge Fund Management

Abstract

We reconsider the question of whether beta-centric hedge fund activity is predictive of superior performance. We construct a measure of overall beta activity of fund managers, Beta Activity, and find evidence that top beta active managers deliver superior long term out-of-sample performance compared to top alpha active managers. Beta Activity successfully captures the time varying nature of beta exposures that could be interpreted as a common factor with both SR (systematic risk) and (1-R2) measures, completely explaining the long term predictive significance of SR, and partially explaining the long term significance of (1-R2). Beta Activity also compares favorably to extant measures of market timing, capturing or partially capturing the explanatory power of such measures in hedge fund performance.

Keywords: hedge funds, alpha, beta, active management, factor timing, performance measurement, performance prediction

JEL Classification: G11, G23