Hedge Fund Returns in a Macro-Economic Context

Abstract

This study analyzes hedge fund returns on a macro-economic level. The intent of our study differs from other studies in that we do not attempt to replicate return strategies or analyze financial market sources in order to explain hedge fund returns. Instead our study, using a compilation of returns from over 2,000 hedge funds, examines macro-economic hedge fund drivers’ abilities to predict returns. To an investor or an economic advisor, the influence macro indicators have over hedge fund returns is substantial. With hedge fund returns explained by macro-economic variables, predictions of future economic activity can be linked directly to more profitable investment strategies for the future. We close by providing a model indicating how to choose hedge fund strategies in which to invest in different economic environments.

TOPICS: Private equity, factor-based models, portfolio construction