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

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 also indicate that best industry-timing hedge funds in the manufacturing sector have the highest return exposure to earnings surprises. This link, together with persistently sticky earnings surprises and the strong predictive power of business cycle indicators over future earnings surprises in the manufacturing sector, explain to a great extent why it is beneficial for skilled hedge fund managers to time the manufacturing industry-specific returns.