Published online by Cambridge University Press: 06 September 2018
We reconsider whether hedge funds’ time-varying risk factor exposures are predictive of superior performance. We construct an overall measure (BA) of fund managers and present evidence that top beta active managers deliver superior long-term out-of-sample performance compared to top alpha active managers. BA captures the time-varying nature of beta exposures and can be interpreted as a common factor of both systematic risk (SR) and (1 - R2) measures. BA also compares favorably to extant measures of market timing, capturing the explanatory power of such measures of hedge fund performance.
We have benefited from comments by George Aragon (a referee), Hendrik Bessembinder (the editor), Chris Clifford, Cristian Tiu (a referee), Zhipeng (Alan) Yan, and seminar and conference participants at Louisiana Tech, University of Arkansas, St. Bonaventure University, and the 2013 Financial Association Annual Meeting and Applied Finance Conference. We are grateful to Yongjia (Eddy) Li for outstanding research assistance.