Hedge Fund Return Predictability; to Combine Forecasts or Combine Information?

37 Pages Posted: 8 Apr 2014

See all articles by Ekaterini Panopoulou

Ekaterini Panopoulou

Essex Business School

Spyridon D. Vrontos

University of Piraeus - Department of Statistics and Insurance Science

Date Written: April 4, 2014

Abstract

While the majority of the predictability literature has been devoted to the predictability of traditional asset classes, the literature on the predictability of hedge fund returns is quite scanty. We focus on assessing the out-of-sample predictability of hedge fund strategies by employing an extensive list of predictors. Aiming at reducing uncertainty risk associated with a single predictor model, we first engage into combining the individual forecasts. We consider various combining methods ranging from simple averaging schemes to more sophisticated ones, such as discounting forecast errors, cluster combining and principal components combining. Our second approach combines information of the predictors and applies kitchen sink, bootstrap aggregating (bagging), lasso, ridge and elastic net specifications. Our statistical and economic evaluation findings point to the superiority of simple combination methods. We also provide evidence on the use of hedge fund return forecasts for hedge fund risk measurement and portfolio allocation. Dynamically constructing portfolios based on the combination forecasts of hedge funds returns leads to considerably improved portfolio performance.

Keywords: Forecast Combination, Combining Information, Prediction; Hedge Funds, Portfolio Construction

JEL Classification: G11, G12, C22, C53

Suggested Citation

Panopoulou, Ekaterini and Vrontos, Spyridon D., Hedge Fund Return Predictability; to Combine Forecasts or Combine Information? (April 4, 2014). Available at SSRN: https://ssrn.com/abstract=2421009 or http://dx.doi.org/10.2139/ssrn.2421009

Ekaterini Panopoulou (Contact Author)

Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Spyridon D. Vrontos

University of Piraeus - Department of Statistics and Insurance Science ( email )

80 Karaoli & Dimitriou str.
Piraeus, 18534
Greece

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
145
Abstract Views
921
rank
249,265
PlumX Metrics