47 Pages Posted: 22 Mar 2007 Last revised: 15 Nov 2013
Date Written: December 29, 2009
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: 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
By Andrew Ang