Predictability and Hedge Fund Investing

9 Pages Posted: 22 Sep 2012

See all articles by Li Cai

Li Cai

Illinois Institute of Technology - Stuart School of Business, IIT

Date Written: August 1, 2012

Abstract

Hedge fund managers are largely free to pursue dynamic trading strategies and standard linear regression is no longer accurate for measuring hedge fund abnormal return (alpha) and risk exposure (beta). Accordingly, this paper presents a dynamic linear model to capture hedge fund dynamics. By allowing time-varying alpha and beta, this dynamic linear model facilitates improved prediction in alpha, beta, and future hedge fund return. By simulating hypothetical trading strategies, we demonstrate that the model-based predictability helps to implement a profitable fund selection process.

Keywords: Hedge Funds

JEL Classification: G10, G11

Suggested Citation

Cai, Li, Predictability and Hedge Fund Investing (August 1, 2012). Journal of Investment Consulting, Vol. 13, No. 1, 30-39, 2012. Available at SSRN: https://ssrn.com/abstract=2144473

Li Cai (Contact Author)

Illinois Institute of Technology - Stuart School of Business, IIT ( email )

Chicago, IL 60661
United States

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