How Hedge Funds Beat the Market

Journal of Investment Management, Vol. 5, No. 2, Second Quarter 2007

Posted: 30 May 2007

See all articles by Craig W. French

Craig W. French

Portfolio Engineering Laboratory

Damian B. Ko

Corbin Capital Partners, L.P.

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Abstract

This paper investigates the determinants of hedge fund portfolio performance - whether hedge funds exhibit security selection skill and market-timing skill. We examine a sample of 157 long-short equity hedge funds over the 10-year period from January, 1996 through December, 2005. To account for nonlinearities we employ the Treynor and Mazuy (1966) quadratic model. To account for illiquidity we incorporate the Scholes and Williams (1977) nonsynchronous data model. Before and after adjusting for illiquidity, we find strong evidence of security selection skill and limited evidence of market-timing skill.

Keywords: Hedge funds; performance attribution; market timing

Suggested Citation

French, Craig W. and Ko, Damian Bongjoon, How Hedge Funds Beat the Market. Journal of Investment Management, Vol. 5, No. 2, Second Quarter 2007. Available at SSRN: https://ssrn.com/abstract=989615

Craig W. French (Contact Author)

Portfolio Engineering Laboratory ( email )

115 Pondview Drive
Washington Crossing, PA Pennsylvania 18977
United States
6108446040 (Phone)

Damian Bongjoon Ko

Corbin Capital Partners, L.P. ( email )

9 West 57th Street
25th Floor
New York, NY 10019
United States
212-634-7354 (Phone)
212-634-7399 (Fax)

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