Do Market Timing Hedge Funds Time the Market?
Texas A&M University - Department of Finance
University of Massachusetts at Amherst - Department of Finance & Operations Management; China Academy of Financial Research (CAFR)
June 12, 2006
Journal of Financial and Quantitative Analysis (JFQA), Vol. 42, No. 4, 2007
EFA 2005 Moscow Meetings
This paper examines whether self-described market timing hedge funds have the ability to time the U.S. equity market. We propose a new measure for timing return and volatility jointly that relates fund returns to the squared Sharpe ratio of the market portfolio. Using a sample of 221 market timing funds during 1994-2005, we find evidence of timing ability at both the aggregate and fund levels. Timing ability appears relatively strong in bear and volatile market conditions. Our findings are robust to other explanations, including public information-based strategies, options trading, and illiquid holdings. Bootstrap analysis shows that the evidence is unlikely to be attributed to luck.
Number of Pages in PDF File: 47
Keywords: Hedge funds, Return timing, Volatility timing, Bootstrap, Persistence
JEL Classification: G11, G23Accepted Paper Series
Date posted: March 18, 2005 ; Last revised: April 19, 2010
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