Understanding Hedge Fund Return Predictability: A Comprehensive Outlook Using a Fund-by-Fund Analysis
Speaker
Abstract
| This paper develops and applies a framework in which to examine the ability of economic variables to forecast individual hedge fund returns. For each predictor, our approach proposes a simple decomposition of the fund population into those exhibiting true return predictability. Our multiple-fund framework properly accounts for predictive relations that are only significant by luck ("false discoveries"), and for the small-sample bias in predictive regressions. Based on monthly returns of more than 3,000 hedge funds spanning the 1994-2006 period, we find strong evidence that future fund returns are positively associated with the current value of the default spread (19.2% of the funds), and negatively with the current values of the VIX index (27.9%) and fund flows (16.5%). The bulk of predictability emerges from time-varying alphas. From a decision making perspective, we show that combining alpha forecasts across both predictors and individual funds consistently outperforms the unconditional alpha portfolio, and ultimately delivers impressive performance. |
| Contact information: |
| Myra Lissenberg |
