The Impact of Macroeconomic Factors on Hedge Fund Returns
Sarlin, Susanna (2015)
2015
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The purpose of this study is to examine the effect of macroeconomic factors on hedge fund returns. The motivation behind this study is based on the previous findings concerning the relationship between macroeconomic factors and other asset classes, such as stock and bond returns. The monthly returns of Hedge Fund Research (HFR) strategy indices are used for historical hedge fund returns and the data runs from 2000 until the beginning of 2014. The macroeconomic variables used in the regression analysis are main risk factors from US markets: default spread between BAA-rated and AAA-rated bonds, inflation rate, industrial production, market index, non-farm payrolls and term spread between 10-year and 3-month treasury securities. To contribute the previous literature, the impact of business confidence and consumer confidence on hedge fund returns is measured.
Firstly, the study analyzes the hedge fund data and characteristics. The results reveal that hedge fund returns are negatively skewed and not clearly normally distributed. These findings are in line with the previous literature’s results of the hedge fund characteristics. Next, the hedge fund performance is examined by risk-adjusted returns using three different measures: Sharpe Ratio, Jensen’s Alpha and Sortino Ratio. The results suggest that the recent financial crisis affected the hedge fund returns, as the hedge funds were able to beat the market in the period before the financial crisis but not during and after the crisis.
The impact of macroeconomic factors on hedge fund returns is measured by time-series regression analysis. The empirical analysis reveals that there are three factors, which have a significant impact on hedge fund index returns: market index, non-farm payrolls and business confidence. The obtained results suggest also that the relationship between macroeconomic factors and hedge fund indices is strongest for Event Driven, Relative Value, Emerging Markets and Fund of Fund strategies.
Firstly, the study analyzes the hedge fund data and characteristics. The results reveal that hedge fund returns are negatively skewed and not clearly normally distributed. These findings are in line with the previous literature’s results of the hedge fund characteristics. Next, the hedge fund performance is examined by risk-adjusted returns using three different measures: Sharpe Ratio, Jensen’s Alpha and Sortino Ratio. The results suggest that the recent financial crisis affected the hedge fund returns, as the hedge funds were able to beat the market in the period before the financial crisis but not during and after the crisis.
The impact of macroeconomic factors on hedge fund returns is measured by time-series regression analysis. The empirical analysis reveals that there are three factors, which have a significant impact on hedge fund index returns: market index, non-farm payrolls and business confidence. The obtained results suggest also that the relationship between macroeconomic factors and hedge fund indices is strongest for Event Driven, Relative Value, Emerging Markets and Fund of Fund strategies.