Presidential Elections, Political Sensitivity, and Hedge Fund Performance

44 Pages Posted: 8 Nov 2016 Last revised: 18 Nov 2016

See all articles by Honghui Chen

Honghui Chen

Department of Finance, University of Central Florida

Alok Kumar

University of Miami - School of Business Administration

Yan Lu

University of Central Florida - College of Business Administration

Ajai K. Singh

Department of Finance, University of Central Florida

Date Written: November 16, 2016

Abstract

We develop and test a hypothesis that hedge-fund managers who respond to and capitalize on the changing political environment around Presidential elections are better skilled. We find that hedge funds, on average, trade in anticipation of the Presidential election outcome, and adjust the political sensitivity of their portfolio accordingly. Managers who adjust their portfolio political sensitivity most successfully generate significantly higher alpha than those that are least successful in their adjustments. The significant superior performance by these funds persists for about a year. We also find that these funds are more likely to survive over the following two years. Our evidence suggests that hedge funds’ anticipation and response to Presidential elections indicate managerial skill and can successfully predict future fund performance.

Keywords: Hedge funds, political sensitivity, Presidential elections, portfolio adjustments, performance evaluation, managerial skill.

JEL Classification: G11, G14, G23

Suggested Citation

Chen, Honghui and Kumar, Alok and Lu, Yan and Singh, Ajai K., Presidential Elections, Political Sensitivity, and Hedge Fund Performance (November 16, 2016). Available at SSRN: https://ssrn.com/abstract=2865206 or http://dx.doi.org/10.2139/ssrn.2865206

Honghui Chen

Department of Finance, University of Central Florida ( email )

PO Box 161400
Orlando, FL 32816
United States
407-823-0895 (Phone)

Alok Kumar (Contact Author)

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

Yan Lu

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

Ajai K. Singh

Department of Finance, University of Central Florida ( email )

College of Business Administration
12744 Pegasus Drive
Orlando, FL 32816
United States
407-823-0761 (Phone)
407-823-6676 (Fax)

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