The macroeconomic drivers in hedge fund beta management

Marie Lambert and Federico Platania

Economic Modelling, 2020, vol. 91, issue C, 65-80

Abstract: We investigate how macroeconomic indicators alter the dynamic risk exposure of different hedge fund style strategies. We implement a multifactor model to estimate the unobservable time-varying risk exposure conditional on macroeconomic information and a VAR to measure the impact of macroeconomic predictors on different time horizons. Using monthly returns on a cross-section of 10 different style indices from February 1997 to August 2019, we find that, on average, macroeconomic indicators explain approximately 30%, 55%, and 75% of the variability of betas at 1-, 6-, and 36-month horizons, respectively. Although macroeconomic predictors play a critical role at every horizon, at 1 month, the dominating effect comes from idiosyncratic shocks, which indicates that in the short run, hedge fund managers rely mostly on their own reallocation signals. Moreover, consistent with the fundamental drivers of the smart beta factors, we find that the interest rate level and GDP growth similarly impact hedge fund exposures across styles.

Keywords: Kalman filter; Macroeconomic indicators; Factor tilting; Conditional betas (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 G23 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:91:y:2020:i:c:p:65-80

DOI: 10.1016/j.econmod.2020.04.016

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