Does Macroeconomic Predictability Enhance the Economic Value of Hedge Funds to Risk-Averse Investors?

Monia Magnani ()

No 24232, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: The academic literature has amassed overwhelming evidence indicating that investment opportunities are hardly driven in a simplistic way by business cycle conditions, when measured by standard macroeconomic aggregates (such as the output gap and inflation). Yet, an industry exists that routinely forecasts business cycle conditions and the policy measures routinely used to manage the length and persistence of recessions and expansions. In this paper, we ask whether standard macroeconomic variables such as measures of output and effective policy interest rates may lead to risk-adjusted economic value to an already well-diversified, risk-averse investor who selects how much of her wealth to allocate to a range of common hedge fund strategies, including hedge funds as a whole. We find that while both the inclusion of hedge funds and the modelling of macro-driven predictability patterns in asset risk premia can generate non-negligible economic value in recursive, out-of-sample portfolio back-testing exercises. Such effects are maximised when hedge fund strategies are available to exploit the forecasting power of macroeconomic predictors.

Keywords: dynamic asset allocation; hedge fund strategies; out-of-sample performance; certainty equivalent return; macroeconomic predictability (search for similar items in EconPapers)
JEL-codes: C53 G11 G12 G17 (search for similar items in EconPapers)
Pages: 64
Date: 2024
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