Abstract
We evaluate investment strategies in hedge funds that incorporate predictability in managerial skills, factor loadings, and benchmark returns. We find that predictability in managerial skills is the dominant source of outperformance. Long-only strategies that allow for predictability in managerial skills outperform their Fung and Hsieh (2004) benchmarks by over 12 percent per year. Moreover, the overperformance is strongest during market downturns. These findings are robust to adjustments for backfill bias, incubation bias, illiquidity-induced serial correlation, fund fees and different rebalancing horizons.
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