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Hedge Fund Return Predictability Under the Magnifying Glass

Published online by Cambridge University Press:  22 August 2013

Doron Avramov ,
Laurent Barras  and
Robert Kosowski
Doron Avramov
Affiliation:
[email protected], School of Business Administration, Hebrew University of Jerusalem, Mount Scopus, Jerusalem 91905, Israel
Laurent Barras
Affiliation:
[email protected], Desautels Faculty of Management, McGill University, 1001 Sherbrooke St W, Montreal QC H3A 1G5, Canada
Robert Kosowski
Affiliation:
[email protected], Business School, Imperial College London, South Kensington Campus, Exhibition Rd, London SW7 2AZ, United Kingdom.
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 4 , August 2013 , pp. 1057 - 1083
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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