This article predicts the relative performance of hedge fund investment styles using time-varying conditional stochastic dominance tests. These tests allow for the construction of dynamic trading strategies based on nonparametric density forecasts of hedge fund returns. During the recent financial turmoil, our tests predict a superior performance for the Global Macro investment style compared with the other strategies of ‘Directional Traders’. The Dedicated Short Bias investment style is stochastically dominated by the other directional styles. These results are confirmed by simple nonparametric tests constructed from realized excess returns. Further, by utilizing a cross-validation method for optimal bandwidth parameter selection, we discover the factors that have predictive power regarding the density of hedge fund returns. We observe that different factors have forecasting power for different regions of the returns distribution and, more importantly, that the Fung and Hsieh factors have power not only for describing the risk premium but also, if appropriately exploited, for density forecasting.

The gravity equation has been frequently and successfully used for nearly thirty years to further understanding of the determinants of bilateral trade flows across countries and, subsequently, to analyze commercial policy measures. A maintained hypothesis by the applied literature on international trade as gravity equation loglinearity is questioned in this paper since the possibility of a general functional form is open through Box-Cox transformations. Using data corresponding to the sixteen OECD most developed countries from 1964 to 1987 the authors reach the conclusion that the optimal functional form is slightly, yet statistically, different from the loglinear form in every year of the sample and they are able to propose one unique functional form suitable for all the sample period. Copyright 1993 by MIT Press.