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The Market Timing Skills of Long/Short Equity Hedge Fund Managers

32 Pages Posted: 21 Feb 2013 Last revised: 1 Sep 2013

Xin Li

State University of New York (SUNY) at Albany - Department of Economics

Hany A. Shawky

State University of New York at Albany - School of Business and Center for Institutional Investment Management

Date Written: July 23, 2013

Abstract

Good market timing skills can be an important factor contributing to hedge funds' out-performance. In this paper we use a unique semi-parametric panel data model capable of providing consistent short period estimates of the return correlations with three market factors for a sample of Long/Short equity hedge funds. We find evidence of significant market timing ability by fund managers around market crisis periods. Studying the behavior of individual fund managers, we show that at the 10% significance level, 17.12% of funds exhibit good linear timing skills and 21.32% of funds possess some level of good nonlinear market timing skills. Further, we find that market timing strategies of hedge funds are different in good and bad markets, and that a significant number of managers behave more conservatively when the market return is expected to be far above average and more aggressively when the market return is expected to be far below average. We find that good market timers are also likely to possess good stock selection skills.

Keywords: Hedge Fund, Market Timing, Nonlinearity, Crisis, Attrition

JEL Classification: G11, G23, C34, C58

Suggested Citation

Li, Xin and Shawky, Hany A., The Market Timing Skills of Long/Short Equity Hedge Fund Managers (July 23, 2013). Available at SSRN: https://ssrn.com/abstract=2221479 or http://dx.doi.org/10.2139/ssrn.2221479

Xin Li

State University of New York (SUNY) at Albany - Department of Economics ( email )

Albany, NY
United States

Hany A. Shawky (Contact Author)

State University of New York at Albany - School of Business and Center for Institutional Investment Management ( email )

School of Business
1400 Washington Ave.
Albany, NY 12222
United States
518-442-4921 (Phone)
518-442-3944 (Fax)

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