Hedge fund return predictability in the presence of model risk*
研究在考虑异方差、非正态性、时变参数、模型选择风险和参数估计风险的情况下，如何提高对冲基金收益预测的准确性，并改善对冲基金组合的绩效。
Hedge funds implement elaborate investment strategies that include a variety of positions and assets. As a result, there is significant time variation in the set of risk factors and their respective loadings which in turn introduces severe model risk in any attempt to model and forecast hedge fund returns. In this study, we investigate the statistical and economic value of incorporating heteroscedasticity, non-normality, time-varying parameters, model selection risk and parameter estimation risk jointly in hedge fund return forecasting and fund of funds construction. Parameter estimation risk is dealt with a time-varying parameter structure, while model selection uncertainty is mitigated by model averaging or model selection. We adopt a dynamic model averaging approach along with the conventional Bayesian averaging technique. Our empirical results suggest that accounting for model risk can significantly improve the forecasting accuracy of hedge fund returns and consequently the performance of funds of hedge funds.