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Investing In Hedge Funds When Returns Are Predictable, Doron Avramov, Robert Kosowski, Narayan Y. Naik, Melvyn Teo
Investing In Hedge Funds When Returns Are Predictable, Doron Avramov, Robert Kosowski, Narayan Y. Naik, Melvyn Teo
Research Collection BNP Paribas Hedge Fund Centre
This paper evaluates hedge fund performance through portfolio strategies that incorporate predictability in managerial skills, fund risk loadings, and benchmark returns. Incorporating predictability substantially improves performance for the entire universe of hedge funds as well as for various investment styles. The outperformance is strongest during market downturns when the marginal utility of consumption is relatively high. Moreover, 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 percent per year. The economic value of predictability obtains for different rebalancing …