Abstract
This study presents the hedge fund portfolio choice model for an investor facing ambiguity or Knightian uncertainty. In the empirical section, we measure ambiguity as the cross-sectional dispersion in the macroeconomic forecasts and in the stock market return forecasts from the Livingston Survey and construct the systematic ambiguity factors from the universe of S&P 500 stocks. We estimate ambiguity betas for long/short equity hedge funds strategies and document signicant ambiguity exposures for directional L/S hedge funds. We compare the out-of-sample performance of portfolios constructed according to the L/S hedge funds alpha ranking with and without systematic ambiguity exposures and nd that the former outperform. These
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