Do Market Timing Hedge Funds Time the Market?

Abstract:     
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, G23

Accepted Paper Series