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Macroeconomic risk and hedge fund returns

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  • Bali, Turan G.
  • Brown, Stephen J.
  • Caglayan, Mustafa O.

Abstract

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.

Suggested Citation

  • Bali, Turan G. & Brown, Stephen J. & Caglayan, Mustafa O., 2014. "Macroeconomic risk and hedge fund returns," Journal of Financial Economics, Elsevier, vol. 114(1), pages 1-19.
    • Handle: RePEc:eee:jfinec:v:114:y:2014:i:1:p:1-19
    DOI: 10.1016/j.jfineco.2014.06.008
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    More about this item

    Keywords

    Hedge funds; Mutual funds; Macroeconomic risk; Economic uncertainty;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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