High Disagreement Predicts Hedge Fund Returns
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Disagreement Exploitation and the Cross-Section of Hedge Funds Performance
Gady Jacoby; Shi Li; Nanying Lin
- Seton Hall University
- CAUniversity of Manitoba
- ILCollege of Management Academic Studies
- ?University of Manitoba - Department of Accounting and Finance
- CACarleton University
- ?Sprott School of Business, Carleton University
- ?University of Manitoba - Asper School of Business
Strategy in a nutshell
Invest in hedge funds with the highest disagreement beta, identifying those likely to exploit mispricing. Construct equal-weighted decile portfolios, going long the top decile and rebalancing monthly.
Economic rationale
Skilled hedge funds capitalize on short-selling constraints and mispricing, generating alpha. High disagreement beta signals potential for superior returns, especially among experienced funds with strong incentive structures.
Backtest performance
Annualised return10.49%
Volatility22.68%
Sharpe ratio0.46