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Detecting Switching Strategies in Equity Hedge Funds


Carol Alexander


University of Sussex - School of Business, Management and Economics

Anca Dimitriu


University of Reading - ISMA Centre

April 2005

ISMA Centre Finance Discussion Paper No. DP2005-07

Abstract:     
Equity hedge funds are thought to effectively operate market timing by implementing switching strategies conditional on market circumstances. In this paper we use only the reported monthly returns on a set of funds to infer the type of switching strategies they follow, if any, as well as their switching times. A set of regime-switching models for each equity hedge funds' returns against various benchmarks are estimated; subsequently we answer the following general questions: What proportion of equity funds seem to have switching strategies in place? Which are the most popular instruments for switching strategies? And what is the relationship between the switching times of different funds? The general methodology applied in this paper may be useful to investors that wish to detect, from only from their reported returns, whether and when a particular fund has been timing the market.

Number of Pages in PDF File: 11

Keywords: Equity Hedge Funds, Markov Switching, Regimes

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Date posted: April 24, 2005  

Suggested Citation

Alexander, Carol and Dimitriu, Anca, Detecting Switching Strategies in Equity Hedge Funds (April 2005). ISMA Centre Finance Discussion Paper No. DP2005-07. Available at SSRN: http://ssrn.com/abstract=706282 or http://dx.doi.org/10.2139/ssrn.706282

Contact Information

Carol Alexander (Contact Author)
University of Sussex - School of Business, Management and Economics ( email )
Falmer, Brighton BN1 9SL
United Kingdom
HOME PAGE: http://www.sussex.ac.uk/bam
Anca Dimitriu
University of Reading - ISMA Centre ( email )
Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
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