Macroeconomic risk and hedge fund returns

Turan G Bali, Stephen J Brown, Mustafa O Caglayan

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85 Citations (Scopus)


This paper estimates hedge fund and mutual fund exposure to newly proposed measures of macroeconomic risk that are interpreted as measures of economic uncertainty. We find that the resulting uncertainty betas explain a significant proportion of the cross-sectional dispersion in hedge fund returns. However, the same is not true for mutual funds, for which there is no significant relationship. After controlling for a large set of fund characteristics and risk factors, the positive relation between uncertainty betas and future hedge fund returns remains economically and statistically significant. Hence, we argue that macroeconomic risk is a powerful determinant of cross-sectional differences in hedge fund returns.
Original languageEnglish
Pages (from-to)1-19
Number of pages19
JournalJournal of Financial Economics
Issue number1
Publication statusPublished - Oct 2014
Externally publishedYes


  • hedge funds
  • mutual funds
  • macroeconomic risk
  • economic uncertainty

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