The macroeconomic drivers in hedge fund beta management

We investigate how macroeconomic indicators alter the dynamic risk exposure of different hedge fund style strategies. We implement a multifactor model to estimate the unobservable time-varying risk exposure conditional to macroeconomic information and a VAR to measure the impact of macroeconomic predictors on different time horizons. Using monthly returns on a cross-section of 10 different style indices from February 1997 to August 2019, we find that, on average, macroeconomic indicators explain approximately 30\%, 55\%, and 75\% variability of betas at 1-, 6-, and 36-months horizons, respectively. Although macroeconomic predictors play a critical role at every horizon, at 1-month the dominating effect comes from idiosyncratic shocks, which indicates that in the short run hedge fund managers mostly rely on their own reallocation signals. Moreover, consistent with the fundamental drivers of the smart beta factors, we find that interest rate level and GDP growth similarly impact hedge fund exposures across styles.