Do Hedge Funds Arbitrage Market Anomalies?

Abstract:     
We investigate whether hedge funds arbitrage market anomalies. We examine a seven-factor model including traditional Fama and French (1993) and Carhart (1997) factors and factors associated with the anomalies of earnings momentum, equity financing, and asset growth rates. We find the average hedge fund employs a strategy consistent with the asset growth rate anomaly factor and opposite to the equity financing factor. On a strategy specific basis, we find that many sectors of hedge funds successfully arbitrage the asset growth anomaly and a few successfully arbitrage the earnings momentum anomaly. We fail to find successful use of the equity financing anomaly. Seven-factor model alphas tend to be positive and significant, indicating funds generate substantial returns unrelated to the seven factors.

Number of Pages in PDF File: 41

Keywords: hedge funds, market anomalies, arbitrage, asset growth, earnings momentum

JEL Classification: G00, G23, G10, G11, G29

working papers series