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Hedge Funds, Managerial Skill, and Macroeconomic Variables

47 Pages Posted: 22 Mar 2007 Last revised: 15 Nov 2013

Doron Avramov

Hebrew University of Jerusalem - Jerusalem School of Business Administration; The Chinese University of Hong Kong (CUHK)

Robert Kosowski

Imperial College Business School; CEPR (Centre for Economic Policy Research); University of Oxford, Oxford-Man Institute of Quantitative Finance

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 29, 2009

Abstract

This paper evaluates hedge fund performance through portfolio strategies that incorporate predictability based on macroeconomic variables. Incorporating predictability substantially improves out-of-sample performance for the entire universe of hedge funds as well as for various investment styles. While we also allow for predictability in fund risk loadings and benchmark returns, the major source of investment profitability is predictability in managerial skills. In particular, long-only strategies that incorporate predictability in managerial skills outperform their Fung and Hsieh (2004) benchmarks by over 17 percent per year. The economic value of predictability obtains for different rebalancing horizons and alternative benchmark models. It is also robust to adjustments for backfill bias, incubation bias, illiquidity, fund termination, and style composition.

Keywords: hedge funds, predictability, managerial skills, macroeconomic variables

JEL Classification: G11, G12, G14, G23

Suggested Citation

Avramov, Doron and Kosowski, Robert and Naik, Narayan Y. and Teo, Melvyn, Hedge Funds, Managerial Skill, and Macroeconomic Variables (December 29, 2009). AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=972058 or http://dx.doi.org/10.2139/ssrn.972058

Doron Avramov

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel

HOME PAGE: http://pluto.huji.ac.il/~davramov/

The Chinese University of Hong Kong (CUHK)

Shatin, N.T.
Hong Kong
Hong Kong

Robert Kosowski (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
+442075943294 (Phone)

HOME PAGE: http://www3.imperial.ac.uk/people/r.kosowski

CEPR (Centre for Economic Policy Research) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

HOME PAGE: http://www.cepr.org/

University of Oxford, Oxford-Man Institute of Quantitative Finance ( email )

Eagle House
Walton Well Road
Oxford, Oxfordshire OX2 6ED
United Kingdom

Narayan Y. Naik

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828 0735 (Phone)
+65 6822 0777 (Fax)

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