Hedge Funds Managerial Skill Revisited: A Quantile Regression Approach

In this paper we revisit the question of measurement of hedge fund managerial skill. Using a plethora of different models, from the simplest ones, employing a linear regression approach, to the more advanced ones, employing a quantile regression approach, we are able to identify and exploit managerial skill. The quantile regression approach enables us to produce robust and accurate estimates of the managerial skill utilizing two different sources of information: (a) the distribution information, regarding how the relationship between the return of the fund and a given variable varies across the conditional quantiles of returns and (b) factor information, regarding the different models that can be used for pricing inference. We show that estimates of the managerial skill based on quantile regressions and robust combination are superior compared to the relevant estimates from the linear pricing equations.
JEL classification: G11; G12.
Keywords: Hedge Funds; Risk Factors; Quantile Regression; Managerial Skill.