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Measuring Hedge Fund Timing Ability Across Factors

Ludwig B. Chincarini and Alex Nakao
The Journal of Investing Winter 2011, 20 (4) 50-70; DOI: https://doi.org/10.3905/joi.2011.20.4.050
Ludwig B. Chincarini
is a professor of economics at Pomona College in Claremont, CA.
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  • For correspondence: chincarinil@hotmail.com
Alex Nakao
is a student at Pomona College in Claremont, CA.
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  • For correspondence: alexnakao@gmail.com
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Abstract

There has been a substantial amount of research on whether mutual funds, and, to a lesser extent, hedge funds, have the ability to time the market. All of these studies have focused on market timing in the sense that they can correctly position their portfolios for a positive or negative movement in the main equity index. Since many hedge funds are sophisticated investors, one might believe that they engage in timing of more than just a single factor. This article tests this hypothesis directly by expanding the Henrikkson–Merton timing factor to all of the Fama–French factors. The authors show in simulations that this may lead to incomplete inference about hedge fund timing ability. They also show, using a sample of equity hedge fund data for 1994–2009, that although many hedge funds are poor market timers, they have timing ability with respect to other risk factors in the economy. In particular, 13% of equity hedge funds have size timing ability, whereas 9% have value timing ability and 7% have market timing ability.

TOPICS: Private equity, factor-based models, simulations

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The Journal of Investing: 20 (4)
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Measuring Hedge Fund Timing Ability Across Factors
Ludwig B. Chincarini, Alex Nakao
The Journal of Investing Nov 2011, 20 (4) 50-70; DOI: 10.3905/joi.2011.20.4.050

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Measuring Hedge Fund Timing Ability Across Factors
Ludwig B. Chincarini, Alex Nakao
The Journal of Investing Nov 2011, 20 (4) 50-70; DOI: 10.3905/joi.2011.20.4.050
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  • Article
    • Abstract
    • MODELS OF PERFORMANCE MEASUREMENT
    • SIMULATIONS
    • DATA
    • EMPIRICAL RESULTS AT FUND INDEX LEVEL
    • EMPIRICAL RESULTS AT INDIVIDUAL FUND LEVEL
    • ON THE PERSISTENCE OF TIMING
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
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