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Matthias Knab, Opalesque: The extant literature has shown that hedge fund trades are affected by macroeconomic variables. However, the literature mostly focuses on the impact of macroeconomic uncertainty on hedge fund performance and market exposure and does not make a direct link between macroeconomic data and larger hedge fund asset allocation.
A new paper "The macroeconomic drivers in hedge fund beta management" by Lambert, Marie [HEC Liège] and Platania, Federico [Leonard De Vinci, Paris] addresses the time-dependency of a selected number of smart beta factors that have been shown to be common across strategies. This is particularly important, as hedge funds tend to package beta management as a form of alpha or abnormal skills. Most strategies entail dynamic trading in alternative risk premia such as the size, value and credit spread. This paper does not investigate the full universe of risk premia but uses commonly accepted risk premia in the hedge fund industry to perform an experiment on the impact of macro-information on factor exposure.
Using monthly returns on a cross-section of 10 different style indices from February 1997 to August 2019, the authors find that, on average, macroeconomic indicators explain approximately 30%, 55%, and 75% variability of betas at 1-, 6-, and 36-months horizons, respectively. Although macroeconomic predictors play a critical role at every horizon, at 1-month the dominating effect comes from idiosyncratic shocks, which i...................... To view our full article Click here
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