Hedge Funds, Managerial Skill, and Macroeconomic Variables

By Doron Avramov, Robert Kosowski, Narayan Naik, Melvyn Teo. 2011

124 citations recorded by the source corpus.

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% 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.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/b13e696497edd9796969948deb6f2b25b327b2ea

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Citations in the corpus

Bayesian Portfolio Analysis (2010, background): “Avramov et al. (2009) consider Duffie & Epstein (1992) preferences to explain the counterintuitive cross-sectional negative relations between average stock returns and the three apparent risk measures (a) credit risk, (b) dispersion, and (c) idiosyncratic volatility.”