Posted: 26 Jan 2004
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: 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