Economic Uncertainty and the Cross-Section of Hedge Fund Returns

OMI Seminar Series

This paper estimates hedge funds’ exposures to alternative measures of economic uncertainty and examines the performance of these uncertainty betas in predicting the cross-sectional variation in hedge fund returns. Economic uncertainty is measured by the time-varying conditional volatility of financial and macroeconomic variables associated with business cycle fluctuations. The results indicate a positive and significant link between uncertainty beta and future hedge fund returns. Funds in the highest uncertainty beta quintile generate 5.5% to 7.5% more average annual returns compared to funds in the lowest uncertainty beta quintile. After controlling for a large set of fund characteristics and risk factors, the positive relation between uncertainty beta and future returns remains economically and statistically significant. Hence, economic uncertainty is a powerful determinant of the cross-sectional differences in hedge fund returns.

Joint work with Stephen Brown and Mustafa Caglayan.



Turan Bali (Georgetown)

Tuesday, May 14, 2013 - 12:30
to 13:30