Chasing Absolute Returns: A Tale of Feedback Trading by Hedge Funds

49 Pages Posted: 20 Feb 2011 Last revised: 1 Feb 2016

See all articles by Marc Schauten

Marc Schauten

Vrije Universiteit Amsterdam

Robin Willemstein

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: December 8, 2011

Abstract

This paper studies the extent of feedback trading at the style level by hedge funds from both a positive and a normative perspective. We show that hedge funds continuously adjust their exposure to different risk factors conditional on the recent performance of these styles. The majority of funds apply a positive feedback strategy, whereas the remaining funds use a negative feedback strategy. This result is robust to the exact specification of the model and also holds out-of-sample. Fund managers do not adjust their exposures in anticipation of future performance; they have limited style timing ability. Finally, we show that positive feedback trading is indeed beneficial to fund performance. If managers could apply the positive feedback strategy more aggressively, however, they would benefit more from it.

Keywords: hedge funds, style analysis, feedback trading, time variation

JEL Classification: G11, G23

Suggested Citation

Schauten, Marc and Willemstein, Robin and Zwinkels, Remco C.J., Chasing Absolute Returns: A Tale of Feedback Trading by Hedge Funds (December 8, 2011). Journal of Empirical Finance, Vol. 34, 2015. Available at SSRN: https://ssrn.com/abstract=1762602 or http://dx.doi.org/10.2139/ssrn.1762602

Marc Schauten

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Robin Willemstein

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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