Hostname: page-component-586b7cd67f-gb8f7 Total loading time: 0 Render date: 2024-11-26T00:13:18.942Z Has data issue: false hasContentIssue false
  • English
  • Français

Do Market Timing Hedge Funds Time the Market?

Published online by Cambridge University Press:  06 April 2009

Yong Chen  and
Bing Liang
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines whether self-described market timing hedge funds have the ability to time the U.S. equity market. We propose a new measure for timing return and volatility jointly that relates fund returns to the squared Sharpe ratio of the market portfolio. Using a sample of 221 market timing funds during 1994–2005, we find evidence of timing ability at both the aggregate and fund levels. Timing ability appears relatively strong in bear and volatile market conditions. Our findings are robust to other explanations, including public information-based strategies, options trading, and illiquid holdings. Bootstrap analysis shows that the evidence is unlikely to be attributed to luck.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 4 , December 2007 , pp. 827 - 856
Copyright
Copyright © School of Business Administration, University of Washington 2007

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.)

References

REFERENCES

Admati, A.; Bhattacharya, S.; Pfleiderer, P.; and Ross, S.. “On Timing and Selectivity.” Journal of Finance, 41 (1986), 715–730.CrossRefGoogle Scholar
Agarwal, V., and Naik, N.. “Risks and Portfolio Decisions Involving Hedge Funds.” Review of Financial Studies, 17 (2004), 63–98.CrossRefGoogle Scholar
Asness, C.; Krail, R.; and Liew, J.. “Do Hedge Funds Hedge?” Journal of Portfolio Management, 28 (2001), 6–19.CrossRefGoogle Scholar
Baquero, G.; Horst, J. ter; and Verbeek, M.. “Survival, Look-Ahead Bias, and Persistence in Hedge Fund Performance.” Journal of Financial and Quantitative Analysis, 40 (2005), 493–517.CrossRefGoogle Scholar
Becker, C.; Ferson, W.; Myers, D.; and Schill, M.. “Conditional Market Timing with Benchmark Investors.” Journal of Financial Economics, 52 (1999), 119–148.CrossRefGoogle Scholar
Bollen, N., and Busse, J.. “On the Timing Ability of Mutual Fund Managers.” Journal of Finance, 56 (2001), 1075–1094.CrossRefGoogle Scholar
Breen, W.; Glosten, L.; and Jagannathan, R.. “Economic Significance of Predictable Variations in Stock Index Returns.” Journal of Finance, 44 (1989), 1177–1189.CrossRefGoogle Scholar
Brown, S.; Gallagher, D.; Steenbeek, O.; and Swan, P.. “Doubling or Nothing: Patterns of Equity Fund Holdings and Transaction.” Working Paper, New York University (2005).Google ScholarPubMed
Brown, S.; Goetzmann, W.; and Ibbotson, R.. “Offshore Hedge Funds: Survival and Performance 1989–95.” Journal of Business, 72 (1999), 91–117.CrossRefGoogle Scholar
Brown, S.; Goetzmann, W.; Ibbotson, R.; and Ross, S.. “Survivorship Bias in Performance Studies.” Review of Financial Studies, 5 (1992), 553–580.CrossRefGoogle Scholar
Busse, J. “Volatility Timing in Mutual Funds: Evidence from Daily Returns.” Review of Financial Studies, 12 (1999), 1009–1041.CrossRefGoogle Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chance, D., and Hemler, M.. “The Performance of Professional Market Timers: Daily Evidence from Executed Strategies.” Journal of Financial Economics, 62 (2001), 377–411.CrossRefGoogle Scholar
Chang, E., and Lewellen, W.. “Market Timing and Mutual Fund Investment Performance.” Journal of Business, 57 (1984), 57–72.CrossRefGoogle Scholar
Chen, Y. “Timing Ability in the Focus Market of Hedge Funds.” Journal of Investment Management, 5 (2007), 66–98.Google Scholar
Chen, Y.; Ferson, W.; and Peters, H.. “Measuring the Timing Ability of Fixed Income Mutual Funds.” Working Paper, Boston College (2005).Google Scholar
Dimson, E. “Risk Management When Shares are Subject to Infrequent Trading.” Journal of Financial Economics, 7 (1979), 197–226.CrossRefGoogle Scholar
Efron, B. “Bootstrap Methods: Another Look at the Jackknife.” Annals of Statistics, 7 (1979), 1–26.CrossRefGoogle Scholar
Elton, E.; Gruber, M.; and Blake, C.. “Survivorship Bias and Mutual Fund Performance.” Review of Financial Studies, 9 (1996), 1097–1120.CrossRefGoogle Scholar
Fama, E. “Components of Investment Performance.” Journal of Finance, 27 (1972), 551–567.Google Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Bonds and Stocks.” Journal of Financial Economics, 23 (1993), 3–56.CrossRefGoogle Scholar
Ferson, W.; Henry, T.; and Kisgen, D.. “Evaluating Government Bond Funds with Stochastic Discount Factors.” Review of Financial Studies, 19 (2006), 423–455.CrossRefGoogle Scholar
Ferson, W., and Khang, K.. “Conditional Performance Measurement Using Portfolio Weights: Evidence from Pension Funds.” Journal of Financial Economics, 65 (2002), 249–282.CrossRefGoogle Scholar
Ferson, W., and Schadt, R.. “Measuring Fund Strategy and Performance in Changing Economic Conditions.” Journal of Finance, 51 (1996), 425–462.CrossRefGoogle Scholar
Ferson, W., and Warther, V.. “Evaluating Fund Performance in a DynamicMarket.” Financial Analysts Journal, 52 (1996), 20–28.CrossRefGoogle Scholar
Fleming, J.; Kirby, C.; and Ostdiek, B.. “The Economic Value of Volatility Timing.” Journal of Finance, 56 (2001), 329–353.CrossRefGoogle Scholar
Fung, W., and Hsieh, D.. “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 Primer on Hedge Funds.” Journal of Empirical Finance, 6 (1999), 309–331.CrossRefGoogle Scholar
Fung, W., and Hsieh, D.. “The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers.” Review of Financial Studies, 14 (2001), 313–341.CrossRefGoogle Scholar
Getmansky, M.; Lo, A.; and Makarov, I.. “An Econometric Model of Serial Correlation and Illiquidity in Hedge Funds Returns.” Journal of Financial Economics, 74 (2004), 529–609.CrossRefGoogle Scholar
Glosten, L., and Jagannathan, R.. “A Contingent Claim Approach to Performance Evaluation.” Journal of Empirical Finance, 1 (1994), 133–160.CrossRefGoogle Scholar
Goetzmann, W.; Ingersoll, J.; and Ivkovich, Z.. “Monthly Measurement of Daily Timers.” Journal of Financial and Quantitative Analysis, 35 (2000), 257–290.CrossRefGoogle Scholar
Henriksson, R. “Market Timing and Mutual Fund Performance: An Empirical Investigation.” Journal of Business, 57 (1984), 73–96.CrossRefGoogle Scholar
Henriksson, R., and Merton, R.. “On Market Timing and Investment Performance II. Statistical Procedures for Evaluating Forecasting Skills.” Journal of Business, 54 (1981), 513–533.CrossRefGoogle Scholar
Horowitz, J. “The Bootstrap.” Working Paper, Northwestern University (2000).Google Scholar
Jagannathan, R., and Korajczyk, R.. “Assessing the Market Timing Performance of Managed Portfolios.” Journal of Business, 59 (1986), 217–235.CrossRefGoogle Scholar
Jensen, M. “The Performance of Mutual Funds in the Period 1945–1964.” Journal of Finance, 23 (1968), 389–346.Google Scholar
Jensen, M. “Optimal Utilization of Market Forecasts and the Evaluation of Investment Performance.” Mathematical Methods in Finance. Amsterdam: North-Holland (1972).Google Scholar
Jiang, G.; Yao, T.; and Yu, T.. “Do Mutual Funds Time theMarket? Evidence from Portfolio Holdings.” Journal of Financial Economics (forthcoming 2008).Google Scholar
Jiang, W. “A Nonparametric Test of Market Timing.” Journal of Empirical Finance, 10 (2003), 399–425.CrossRefGoogle Scholar
Kan, R., and Zhou, G.. “Modeling Non-Normality Using Multivariate t: Implications for Asset Pricing.” Working Paper, Washington University at St. Louis (2003).Google Scholar
Kosowski, R.; Timmermann, A.; White, H.; and Wermers, R.. “Can Mutual Fund ‘Stars’ Really Pick Stocks? New Evidence from a Bootstrap Analysis.” Journal of Finance, 61 (2006), 2551–2595.CrossRefGoogle Scholar
Laplante, M. “Conditional Market Timing with Heteroskedasticity.” Unpubl. Ph.D. Dissertation, University of Washington (2003).Google Scholar
Lee, C., and Rahman, S.. “Market Timing, Selectivity, and Mutual Fund Performance: An Empirical Investigation.” Journal of Business, 63 (1990), 261–278.CrossRefGoogle Scholar
Liang, B. “Hedge Funds: The Living and the Dead.” Journal of Financial and Quantitative Analysis, 35 (2000), 309–326.CrossRefGoogle Scholar
Merton, R. “On Market Timing and Investment Performance I: An Equilibrium Theory of Value for Market Forecasts.” Journal of Business, 54 (1981), 363–407.CrossRefGoogle Scholar
Rubinstein, M. “A Comparative Static Analysis of Risk Premium.” Journal of Business, 46 (1973), 605–615.CrossRefGoogle Scholar
Scholes, M., and Williams, J.. “Estimating Betas from Nonsynchronous Data.” Journal of Financial Economics, 5 (1977), 309–328.CrossRefGoogle Scholar
ter Horst, J.; Nijman, T.; and Verbeek, M.. “Eliminating Look-Ahead Bias in Evaluating Persistence in Mutual Fund Performance.” Journal of Empirical Finance, 8 (2001), 345–373.CrossRefGoogle Scholar
Treynor, J., and Mazuy, K.. “Can Mutual Funds Outguess the Market?” Harvard Business Review, 44 (1966), 131–136.Google Scholar
Zellner, A.An Introduction to Bayesian Inferences in Econometrics. New York: John Wiley & Sons (1971).Google Scholar