Hostname: page-component-586b7cd67f-rdxmf Total loading time: 0 Render date: 2024-11-20T14:38:06.216Z Has data issue: false hasContentIssue false
  • English
  • Français

Does Industry Timing Ability of Hedge Funds Predict Their Future Performance, Survival, and Fund Flows?

Published online by Cambridge University Press:  13 October 2020

Turan G. Bali ,
Stephen J. Brown ,
Mustafa O. Caglayan  and
Umut Celiker
Turan G. Bali
Affiliation:
Georgetown University McDonough School of [email protected]
Stephen J. Brown
Affiliation:
Monash Business School and NYU Stern School of [email protected]
Mustafa O. Caglayan*
Affiliation:
Florida International University College of Business
Umut Celiker
Affiliation:
Cleveland State University Monte Ahuja College of [email protected]
*
[email protected] (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper investigates hedge funds’ ability to time industry-specific returns and shows that funds’ timing ability in the manufacturing industry improves their future performance, probability of survival, and ability to attract more capital. The results indicate that the best industry-timing hedge funds in the manufacturing sector have the highest return exposure to earnings surprises. This, together with persistently sticky earnings surprises, transparent information environment in regards to earnings releases, and large post-earnings-announcement drift in the manufacturing industry, explain to a great extent why best-timing hedge funds can generate significantly larger future returns compared to worst-timing hedge funds.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 6 , September 2021 , pp. 2136 - 2169
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank an anonymous referee, Vikas Agarwal, George Aragon, Yong Chen, Jarrad Harford (the editor), Bing Liang, and Tim Simin (a referee) for their constructive comments and suggestions. We also benefited from discussions with Michael Gallmeyer, Shahid Hamid, Qiping Huang, Qiang Kang, Edward Lawrance, Ozde Oztekin, Gokhan Sonaer, Quan Wen, and seminar participants at Florida International University and Georgetown University. We thank Kenneth French and David Hsieh for making a large amount of data publicly available in their online data library. We thank Vikas Agarwal for sharing data on options factors. All errors remain our responsibility.

References

Agarwal, V.; Arisoy, Y. E.; and Naik, N. Y.. “Volatility of Aggregate Volatility and Hedge Fund Returns.” Journal of Financial Economics, 125 (2017), 491–510.CrossRefGoogle Scholar
Agarwal, V.; Fos, V.; and Jiang, W.. “Inferring Reporting-Related Biases in Hedge Fund Databases from Hedge Fund Equity Holdings.” Management Science, 59 (2013), 1271–1289.CrossRefGoogle Scholar
Aggarwal, R. K., and Jorion, P.. “The Performance of Emerging Hedge Funds and Managers.” Journal of Financial Economics, 96 (2010), 238–256.CrossRefGoogle Scholar
Agarwal, V., and Naik, N. Y.. “Multi-Period Performance Persistence Analysis of Hedge Funds.” Journal of Financial and Quantitative Analysis, 35 (2000), 327–342.CrossRefGoogle Scholar
Agarwal, V., and Naik, N. Y.. “Risks and Portfolio Decisions Involving Hedge Funds.” Review of Financial Studies, 17 (2004), 63–98.CrossRefGoogle Scholar
Agarwal, V.; Ruenzi, S.; and Weigert, F.. “Tail Risk in Hedge Funds: A Unique View from Portfolio Holdings.” Journal of Financial Economics, 125 (2017), 610–636.CrossRefGoogle Scholar
Aragon, G. O. “Share Restrictions and Asset Pricing: Evidence from the Hedge Fund Industry.” Journal of Financial Economics, 83 (2007), 33–58.CrossRefGoogle Scholar
Aragon, G. O.; Martin, J. S.; and Shi, Z.. “Who Benefits in a Crisis? Evidence from Hedge Fund Stock and Option Holdings.” Journal of Financial Economics, 131 (2019), 345–361.CrossRefGoogle Scholar
Bali, T. G.; Brown, S. J.; and Caglayan, M. O.. “Do Hedge Funds’ Exposures to Risk Factors Predict Their Future Returns?” Journal of Financial Economics, 101 (2011), 36–68.CrossRefGoogle Scholar
Bali, T. G.; Brown, S. J.; and Caglayan, M. O.. “Systematic Risk and the Cross-Section of Hedge Fund Returns.” Journal of Financial Economics, 106 (2012), 114–131.CrossRefGoogle Scholar
Bali, T. G.; Brown, S. J.; and Caglayan, M. O.. “Macroeconomic Risk and Hedge Fund Returns.” Journal of Financial Economics, 114 (2014), 1–19.CrossRefGoogle Scholar
Brunnermeier, M. K., and Nagel, S.. “Hedge Funds and the Technology Bubble.” Journal of Finance, 59 (2004), 2013–2040.CrossRefGoogle Scholar
Busse, J. “Volatility Timing in Mutual Funds: Evidence from Daily Returns.” Review of Financial Studies, 12 (1999), 1009–1041.CrossRefGoogle Scholar
Cao, C.; Chen, Y.; Liang, B.; and Lo, A. W.. “Can Hedge Funds Time Market Liquidity?” Journal of Financial Economics, 109 (2013), 493–516.CrossRefGoogle Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chen, Y., and Liang, B.. “Do Market Timing Hedge Funds Time the Market?” Journal of Financial and Quantitative Analysis, 42 (2007), 827–856.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Industry Costs of Equity.” Journal of Financial Economics, 43 (1997), 153–193.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk and Return: Some Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Ferson, W., and Schadt, R.. “Measuring Fund Strategy and Performance in Changing Economic Conditions.” Journal of Finance, 51 (1996), 425–460.CrossRefGoogle Scholar
Fung, W., and Hsieh, D. A.. “Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds.” Review of Financial Studies, 10 (1997), 275–302.CrossRefGoogle Scholar
Fung, W., and Hsieh, D. A.. “Performance Characteristics of Hedge Funds and CTA Funds: Natural versus Spurious Biases.” Journal of Financial and Quantitative Analysis, 35 (2000), 291–307.CrossRefGoogle Scholar
Fung, W., and Hsieh, D. A.. “The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers.” Review of Financial Studies, 14 (2001), 313–341.CrossRefGoogle Scholar
Fung, W., and Hsieh, D. A.. “Hedge Fund Benchmarks: A Risk-Based Approach.” Financial Analysts Journal, 60 (2004), 65–80.CrossRefGoogle Scholar
Fung, W.; Hsieh, D. A.; Naik, N. Y.; and Ramadorai, T.. “Hedge Funds: Performance, Risk, and Capital Formation.” Journal of Finance, 63 (2008), 1777–1803.CrossRefGoogle Scholar
Getmansky, M.; Lo, A. W.; and Makarov, I.. “An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns.” Journal of Financial Economics, 74 (2004), 529–609.CrossRefGoogle Scholar
Griffin, J. M., and Xu, J.. “How Smart are the Smart Guys? A Unique View from Hedge Fund Stock Holdings.” Review of Financial Studies, 22 (2009), 2331–2370.CrossRefGoogle Scholar
Grinblatt, M., and Titman, S.. “Portfolio Performance Evaluation: Old Issues and New Insights.” Review of Financial Studies, 2 (1989), 393–421.CrossRefGoogle Scholar
Henriksson, R. D., and Merton, R. C.. “On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills.” Journal of Business, 54 (1981), 513–533.CrossRefGoogle Scholar
Huang, S.; O’Hara, M.; and Zhong, Z.. “Innovation and Informed Trading: Evidence from Industry ETFs.” Working Paper, Cornell University Johnson College of Business (2020).Google Scholar
Imhoff, E., and Lobo, G.. “The Effect of Ex Ante Earnings Uncertainty on Earnings Response Coefficients.” Accounting Review, 67 (1992), 427–439.Google Scholar
Jagannathan, R., and Korajczyk, R. A.. “Assessing the Market Timing Performance of Managed Portfolios.” Journal of Business, 59 (1986), 217–235.CrossRefGoogle Scholar
Jagannathan, R.; Malakhov, A.; and Novikov, D.. “Do Hot Hands Exist among Hedge Fund Managers? An Empirical Evaluation.” Journal of Finance, 65 (2010), 217–255.CrossRefGoogle Scholar
Jiang, G.; Yao, T.; and Yu, T.. “Do Mutual Funds Time the Market? Evidence from Portfolio Holdings.” Journal of Financial Economics, 86 (2007), 724–758.CrossRefGoogle Scholar
Kim, D., and Kim, M.. “A Multifactor Explanation of Post-Earnings Announcement Drift.” Journal of Financial and Quantitative Analysis, 38 (2003), 383–398.CrossRefGoogle Scholar
Liang, B. “Hedge Fund: The Living and the Dead.” Journal of Financial and Quantitative Analysis, 35 (2000), 309–326.CrossRefGoogle Scholar
Liang, B., and Park, H.. “Risk Measures for Hedge Funds: A Cross-Sectional Approach.” European Financial Management, 13 (2007), 333–370.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “Automatic Leg Selection in Covariance Matrix Estimation.” The Review of Economic Studies, 61 (1994), 631–653.CrossRefGoogle Scholar
Sadka, R. “Liquidity Risk and the Cross-Section of Hedge Fund Returns.” Journal of Financial Economics, 98 (2010), 54–71.CrossRefGoogle Scholar
Shanken, J. “On the Estimation of Beta-Pricing Models.” Review of Financial Studies, 5 (1992), 1–33.CrossRefGoogle Scholar
Titman, S., and Tiu, C.. “Do the Best Hedge Funds Hedge?” Review of Financial Studies, 24 (2011), 123–168.CrossRefGoogle Scholar
Treynor, J., and Mazuy, K.. “Can Mutual Funds Outguess the Market?” Harvard Business Review, 44 (1966), 131–136.Google Scholar
Supplementary material: PDF

Bali et al. supplementary material

Online Appendix

Download Bali et al. supplementary material(PDF)
PDF 781.3 KB