The Influence of Macroeconomic and Behavioral
Factors on Tactical Strategy Allocation (TSA)
for Funds of Hedge Funds

Abstract

Market factors like high yield credit spreads, merger spreads, or Fama French factors—commonly addressed as alternative beta factors—have been shown to significantly impact the performance of many hedge fund strategies. However, the nature of the influence as determining factors for the risk/return profiles of hedge fund strategies and their benefit for tactical strategy allocation (TSA) have only been fractionally discussed in the academic world. This study highlights the non-linear influence of macroeconomic factors (OECD lead indicator), market factors (volatility), and behavioral factors (crowdedness and risk aversion) on the performance of various hedge fund strategies and tactical strategy allocation for funds of hedge funds. A kernel regression technique is employed to address the non-linear and the non-Gaussian distributed hedge fund returns. Finally, similar to traditional asset classes, the importance of TSA within the context of funds of hedge funds has been shown.

TOPICS: Real assets/alternative investments/private equity, analysis of individual factors/risk premia, statistical methods, performance measurement