Upside Potential of Hedge Funds as a Predictor of Future Performance

80 Pages Posted: 18 Sep 2015 Last revised: 8 Nov 2018

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business

Mustafa Onur Caglayan

Florida International University

Date Written: June 1, 2018

Abstract

This paper investigates the relationship between upside potential and future hedge fund returns. We measure upside potential based on the maximum monthly returns of hedge funds (MAX) over a fixed time interval, and show that MAX successfully predicts cross-sectional differences in future fund returns. Hedge funds with strong upside potential generate 0.70% per month higher average returns than funds with weak upside potential. After controlling for alternative risk and performance measures, funds’ market-timing ability, and a large set of fund characteristics, the positive link between MAX and future returns remains highly significant. We conclude that MAX, as a simple proxy for realized non-normalities in hedge funds, offers incremental information on future hedge fund returns above and beyond provided by standard risk, performance, and market-timing measures.

Keywords: hedge funds; upside potential; return predictability

JEL Classification: G10, G11, C13

Suggested Citation

Bali, Turan G. and Brown, Stephen and Caglayan, Mustafa Onur, Upside Potential of Hedge Funds as a Predictor of Future Performance (June 1, 2018). Georgetown McDonough School of Business Research Paper No. 2661752. Available at SSRN: https://ssrn.com/abstract=2661752 or http://dx.doi.org/10.2139/ssrn.2661752

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://faculty.msb.edu/tgb27/

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Mustafa Onur Caglayan (Contact Author)

Florida International University ( email )

College of Business
11200 S.W. 8th St, Ryder Building 223B
Miami, FL 33199
United States
(305) 348-8430 (Phone)

HOME PAGE: http://https://business.fiu.edu/faculty/expert-guides.cfm?FlagDirectory=Display&EMP=caglayanm

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