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An advanced perspective on the predictability in hedge fund returns

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  • Wegener, Christian
  • von Nitzsch, Rüdiger
  • Cengiz, Cetin
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    Abstract

    This paper advances the research on the predictability in hedge fund returns, using a broad set of risk factors within a variety of different prediction models. Accounting for the fact that returns are non-normally distributed, heteroscedastic and time-varying in their exposure to pervasive economic risk factors, we advocate a non-parametric backward elimination regression approach. The interdependencies between the monthly changes of envisaged risk factors and the subsequent hedge fund returns remain remarkably stable in terms of the observed direction of impact. Thus, taking into account the specific characteristics of this asset class, we find strong evidence of its return predictability.

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    File URL: http://www.sciencedirect.com/science/article/B6VCY-5041284-1/2/ce401c683408eeb5bcc1c5c1e8c6f4ee
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 11 (November)
    Pages: 2694-2708

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:11:p:2694-2708

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Return predictability Non-parametric estimation Meta hedge fund indices In-sample break point model Risk factors;

    References

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    Citations

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    Cited by:
    1. Olmo, José & Sanso-Navarro, Marcos, 2012. "Forecasting the performance of hedge fund styles," Journal of Banking & Finance, Elsevier, vol. 36(8), pages 2351-2365.
    2. Todd Clark & Michael W. McCracken, 2011. "Tests of equal forecast accuracy for overlapping models," Working Paper 1121, Federal Reserve Bank of Cleveland.
    3. Harris, Richard D.F. & Mazibas, Murat, 2010. "Dynamic hedge fund portfolio construction," International Review of Financial Analysis, Elsevier, vol. 19(5), pages 351-357, December.
    4. Harris, Richard D.F. & Mazibas, Murat, 2013. "Dynamic hedge fund portfolio construction: A semi-parametric approach," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 139-149.
    5. Giannikis, Dimitrios & Vrontos, Ioannis D., 2011. "A Bayesian approach to detecting nonlinear risk exposures in hedge fund strategies," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1399-1414, June.
    6. Darolles, Serge & Vaissié, Mathieu, 2012. "The alpha and omega of fund of hedge fund added value," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1067-1078.

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