Predictability in Hedge Fund Returns

Posted: 26 Jan 2004  

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

Abstract

A significant amount of research has been devoted to the predictability of traditional asset classes, but little is known about the predictability of returns emanating from alternative vehicles, such as hedge funds. We attempt to fill this gap by documenting evidence of predictability in hedge fund returns. Using multifactor models for the return on nine hedge fund indexes, for which the factors were chosen to measure the many dimensions of financial risk, we found strong evidence of significant predictability in hedge fund returns. We also found that the benefits of tactical style allocation portfolios are potentially large. We obtained even more spectacular results for an equity-oriented portfolio that mixed traditional and alternative investment vehicles and for a debt-oriented portfolio that mixed traditional and alternative investment vehicles. These results do not seem to have been significantly affected by the presence of reasonably high transaction costs.

Keywords: Alternative investments, hedge fund strategies, portfolio management, asset allocation

Suggested Citation

Amenc, Noel and El Bied, Sina and Martellini, Lionel, Predictability in Hedge Fund Returns. Financial Analysts Journal, Vol. 59, No. 5, pp. 32-46, September/October 2003. Available at SSRN: https://ssrn.com/abstract=489583

Noel Amenc (Contact Author)

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

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

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