Does Factor Timing Explain Hedge Fund Alpha?

Posted: 16 Jan 2011 Last revised: 11 Dec 2013

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2013


This paper empirically decomposes hedge fund excess return into factor timing, security selection, and risk premium using Lo (2008)’s performance measure. Portfolio-level tests show that security selection explains most of the excess return generated by hedge funds during 1994-2009, and the contribution of factor timing is small. Fund-level tests find significant evidence of both positive and negative timing, but the excess return of positive timing funds is not significantly higher than that of the other funds. These findings imply that factor timing is not the main source of hedge fund alpha, and the results are robust to different factor models.

Keywords: Factor Timing, Security Selection, Hedge Fund Alpha, Return Decomposition

JEL Classification: G01, G11, G17, G23

Suggested Citation

Park, Hyuna, Does Factor Timing Explain Hedge Fund Alpha? (August 1, 2013). Available at SSRN: or

Hyuna Park (Contact Author)

Brooklyn College - CUNY ( email )

2900 Bedford Ave
Brooklyn, NY NY 11210
United States

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