Evidence of Predictability in Hedge Fund Returns and Multi-Style Multi-Class Tactical Style Allocation Decisions

33 Pages Posted: 26 Mar 2002  

Noel Amenc

EDHEC Business School

Sina El Bied

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE)

Lionel Martellini

EDHEC Business School

Date Written: March 2002

Abstract

While there has been a significant amount of research on the predictability of traditional asset classes, very little is known about the predictability of returns emanating from alternative vehicles such as hedge funds. This is perhaps surprising, given that significant attempts at structuring the alternative investment markets have occurred over the last decade which now allow investors to implement dynamic trading strategies in hedge fund indexes. This paper attempts to fill this gap by documenting evidence of predictability in hedge fund index returns, focusing on their use for tactical style allocation decisions. Using data from nine CSFB-Tremont hedge fund indexes, we find that there is strong evidence of very significant predictability in hedge fund returns. We also find that the benefits in terms of tactical style allocation portfolios are potentially very large. Even more spectacular results are obtained both for an equity-oriented portfolio mixing traditional and alternative investment vehicles, and for a fixed-income oriented portfolio mixing traditional and alternative investment vehicles. These results do not seem to be significantly affected by the presence of reasonably high transaction costs.

Suggested Citation

Amenc, Noel and El Bied, Sina and Martellini, Lionel, Evidence of Predictability in Hedge Fund Returns and Multi-Style Multi-Class Tactical Style Allocation Decisions (March 2002). USC FBE Working Paper No. 02-5. Available at SSRN: https://ssrn.com/abstract=305008 or http://dx.doi.org/10.2139/ssrn.305008

Noel Amenc

EDHEC Business School ( email )

58, rue du Port
Lille Cedex, 59046
France
+33493187825 (Phone)

Sina El Bied

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE) ( email )

92245 Malakoff Cedex
France

Lionel Martellini (Contact Author)

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

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