Hedge fund performance prediction
61 Pages Posted: 11 Sep 2017 Last revised: 16 Jul 2019
Date Written: June 5, 2019
This paper studies the forecasting power of a comprehensive set of hedge fund performance predictors introduced in prior research. Several predictors based on skill and incentives select top quintiles that significantly outperform bottom quintiles. The benefit realized by investors deteriorates after reversing upward biases in returns and constraining the number of funds selected. In a multi-asset class portfolio, seven of the predictors reliably select funds that raise the Sharpe ratio compared to a stock/bond portfolio over the 1997 – 2016 sample. Hedge fund allocations reduce volatility robustly through time, but leave the Sharpe ratio unchanged in the 2008 – 2016 sub-period.
Keywords: hedge fund performance
JEL Classification: G11, G12, G14, C31
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