Timing Multiple Markets: Theory and Evidence
48 Pages Posted: 24 Jul 2003
Date Written: November 2002
I extend the classical market timing model of Merton (1981) to the case of multiple risk factors and derive the equilibrium value of a market timer's forecasting ability. This result implies a class of return-based parametric estimators that allow consistent estimation of a portfolio manager's ability to 'time multiple markets.' I apply these tests to evaluate the performance of 'fund of funds' hedge fund managers and show that, both individually and on aggregate, fund of funds managers do not exhibit timing ability with respect to a variety of hedge fund styles. However, I argue that this result is due to liquidity constraints created by the hedge funds into which these vehicles invest.
Note: Previously titled "Style Timing"
Keywords: Performance Evaluation, Market Timing, Styles, Hedge Funds
JEL Classification: G11, G12, G13
Suggested Citation: Suggested Citation