Are Multi-Strategy Hedge Funds Able to Time Strategies?

Details

Supervisors

Gibson Brandon, Rajna Nicole

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale

Abstract

We study multi-strategy hedge funds and their supposed ability to time strategies. Indeed, investors can expect these funds to exhibit significant skills in predicting their strategies’ returns and consequently reallocating their capital across these strategies to generate additional performance. We evaluate the existence of such specific skills using a small sample of 90 multi-strategy funds from the TASS database, on the period spanning from January 1994 to December 2017. Building on the previous timing literature, we design two types of econometric models which both allow for the presence of strategy timing skills. Our results show that multi-strategy managers do not possess true strategy timing ability, i.e. spanning from superior information. However, they are able to react to publicly available signals to optimally reallocate capital across strategies. We conjecture that their flexibility in switching strategies ultimately constitutes their main advantage over funds-of-hedge-funds. We do observe some evidence of true strategy timing abilities, both at the aggregate and fund levels, but these are later shown to be the consequence of luck on the part of some managers. Our results are robust to various additional tests, and we conjecture that the presence of upward data biases in our sample eventually increases the external validity of this study.