Hedge fund return predictability under the magnifying glass

Doron Avramov, Laurent Barras*, Robert Kosowski

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

33 Scopus citations

Abstract

This paper develops a unified approach to comprehensively analyze individual hedge fund return predictability, both in- and out-of-sample. In-sample, we find that variation in hedge fund performance across changing market conditions is widespread and economically significant. The predictability pattern is consistent with economic rationale, and largely reflects differences in key hedge fund characteristics, such as leverage or capacity constraints. Out-of-sample, we show that a simple strategy that combines the funds' return forecasts obtained from individual predictors delivers superior performance. We exploit this simplicity to highlight the drivers of this performance, and find that in- and out-of-sample predictability are closely related.

Original languageAmerican English
Pages (from-to)1057-1083
Number of pages27
JournalJournal of Financial and Quantitative Analysis
Volume48
Issue number4
DOIs
StatePublished - Aug 2013

Bibliographical note

Funding Information:
We thank Bill Fung, Tarun Ramadorai, Sergei Sarkissian, Olivier Scaillet, Stas Sokolinski, Melvyn Teo, Jialin Yu, seminar participants at HEC-Montreal, Imperial College, McGill University, Tilburg University, the University of Rotterdam, the University of Toronto, the 4th Imperial College London conference on hedge funds, the 2nd INSEE/CREST conference on hedge funds, the 2009 meeting of the European Finance Association (EFA), the 2010 meeting of the Institute for Mathematical Finance (IFM2), and the 2011 meeting of the Financial Management Association (FMA) and, especially, the editor (Stephen Brown) and an anonymous referee for their comments. The second author thanks the Institute for Mathematical Finance (IFM2) for its financial support. 08 2013 48 4 1057 1083 Copyright © Michael G. Foster School of Business, University of Washington 2013 2013 Michael G. Foster School of Business, University of Washington

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