Do Hedge Funds Arbitrage Market Anomalies?

41 Pages Posted: 9 Jan 2008 Last revised: 26 Oct 2009

Andy Fodor

Ohio University

Dan Lawson

Gonzaga University

David R. Peterson

Florida State University - Department of Finance

Date Written: October 25, 2009

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.

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

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

Suggested Citation

Fodor, Andy and Lawson, Dan and Peterson, David R., Do Hedge Funds Arbitrage Market Anomalies? (October 25, 2009). Available at SSRN: https://ssrn.com/abstract=1081943 or http://dx.doi.org/10.2139/ssrn.1081943

Andy Fodor

Ohio University ( email )

234 Copeland
Athens, OH 45701
United States
740.593.0514 (Phone)

Daniel T. Lawson (Contact Author)

Gonzaga University ( email )

502 E Boone Ave
Spokane, WA 99258
United States

David R. Peterson

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States
850-644-8200 (Phone)
850-644-4225 (Fax)

Paper statistics

Downloads
924
Rank
19,123
Abstract Views
3,965