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Publication The predictability of alternative UCITS fund returns

Type

Working Paper

Institution(s)

University of Hamburg, Absolut Research GmbH

Year

2017

Author(s)

Michael Busack

Wolfgang Drobetz

Jan Tille

Research Area

Alternative Investments, Asset Management

Keywords

Alternative mutual funds, UCITS funds, hedge funds, return prediction

Abstract

We analyze the out-of-sample predictability of the returns of pan-European harmonized mutual funds that apply hedge fund-like investment strategies (“Alternative UCITS”). Given these funds’ higher liquidity, investors could exploit relevant information much easier than for hedge funds, and use it for asset allocation and risk management. We use a comprehensive set of variables, fundamental as well as technical, and apply single predictor models, combination forecasts, and multivariate regression models. Our results show that in terms of out-of-sample R2, predictive models do not lead to more accurate forecasts than historic average returns. Nonetheless, forming portfolios based on predicted returns can yield substantial economic gains to investors, especially during times of market crises. Combination approaches and multivariate models can reduce estimation uncertainty stemming from time-varying predictive performance of single predictor models, leading to economic gains across different market environments.

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