Do hedge funds' exposures to risk factors predict their future returns?

Turan G Bali, Stephen J Brown, Mustafa Onur Caglayan

Research output: Contribution to journalArticleResearchpeer-review

67 Citations (Scopus)

Abstract

This paper investigates hedge funds exposures to various financial and macroeconomic risk factors through alternative measures of factor betas and examines their performance in predicting the cross-sectional variation in hedge fund returns. Both parametric and non-parametric tests indicate a significantly positive (negative) link between default premium beta (inflation beta) and future hedge fund returns. The results are robust across different subsample periods and states of the economy, and after controlling for market, size, book-to-market, and momentum factors as well as the trend-following factors in stocks, short-term interest rates, currencies, bonds, and commodities. The paper also provides macro-level and micro-level explanations of our findings.
Original languageEnglish
Pages (from-to)36 - 68
Number of pages33
JournalJournal of Financial Economics
Volume101
Issue number1
DOIs
Publication statusPublished - 2011
Externally publishedYes

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