Seasonality in Hedge Fund Strategies

Abstract:     
As the year goes by, many market participants form expectations as to the effect of certain months on financial markets. Be it the summer doldrums, where trading volume decreases and price action subsides to the January effect, where most expect equity prices to rise in the month. These and other "expectations" have permeated the financial community and have more or less been accepted as common occurrence. Recently, research has demonstrated a December effect in hedge fund returns where returns are greater in this month than other months. Taking the positive effect of December on hedge fund returns into consideration, the question arises whether any other seasonal effects can be found to exist in the hedge fund space. Using the Hedge Fund Research indexes as representative of most hedge fund strategies, it is demonstrated through quarterly and monthly dummy variable regressions that various months have differing effects on the various hedge fund strategies. Also, a panel regression is performed to find cyclical behaviour between years, demonstrating that even years have a more negative impact of hedge fund strategies than odd years. These findings suggest that there are numerous seasonal effects on hedge fund strategies with implications for hedge fund portfolio construction and risk management.

Keywords: Seasonality, hedge funds, cycles, dummy variables

JEL Classifications: C20, C23, C25, G20, E32

Working Paper Series