Hedge funds, managerial skill, and macroeconomic variables

Doron Avramov, Robert Kosowski, Narayan Y. Naik*, Melvyn Teo

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

62 Scopus citations


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.

Original languageAmerican English
Pages (from-to)672-692
Number of pages21
JournalJournal of Financial Economics
Issue number3
StatePublished - Mar 2011

Bibliographical note

Funding Information:
We thank an anonymous referee, seminar participants at Bar Ilan University and the Interdisciplinary Center, Herzliya, Israel, as well as participants at the 2008 American Finance Association meetings (especially Luis Viceira, the discussant), the 2007 Erasmus University Rotterdam Conference on Professional Asset Management (especially Nick Bollen, the discussant), and the 2006 Imperial College Hedge Fund Centre Conference for valuable comments and suggestions. We gratefully acknowledge financial support from the BNP Paribas Hedge Fund Centre at the Singapore Management University and from INQUIRE, UK. This article represents the views of the authors and not of BNP Paribas or INQUIRE. The usual disclaimer applies. This paper was previously circulated under the title “Investing in hedge funds when returns are predictable”.


  • Hedge funds
  • Macroeconomic variables
  • Managerial skills
  • Predictability


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