Hedge Fund Return Predictability Under the Magnifying Glass

Posted: 26 Mar 2012  

Doron Avramov

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Laurent Barras

McGill University - Desautels Faculty of Management

Robert Kosowski

Imperial College Business School; CEPR (Centre for Economic Policy Research); University of Oxford, Oxford-Man Institute of Quantitative Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 25, 2012

Abstract

This paper develops a unified approach to comprehensively analyse 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

Avramov, Doron and Barras, Laurent and Kosowski, Robert, Hedge Fund Return Predictability Under the Magnifying Glass (March 25, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2028706

Doron Avramov

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

HOME PAGE: http://pluto.huji.ac.il/~davramov/

Laurent Barras (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
+15143988862 (Phone)

Robert Kosowski

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
+442075943294 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/r.kosowski

CEPR (Centre for Economic Policy Research) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

HOME PAGE: http://www.cepr.org/

University of Oxford, Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

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