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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 Lee Kong Chian School Of Business
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 various subsets based on investment styles. Such out-performance 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 predictable skills outperform their Fung and Hsieh (2004) benchmarks by over 12 percent per year. The economic value of predictability obtains for various rebalancing …