Timing is Money: The Factor Timing Ability of Hedge Fund Managers

This paper studies the level, determinants, and persistence of the factor timing ability of hedge fund managers. We find strong evidence in favor of factor timing ability at the aggregate level, although we find ample variation in timing skills across investment styles and factors at the fund level. Our cross-sectional analysis shows that better factor timing skills are related to funds that are younger, smaller, have higher incentive fees, have a smaller restriction period, and make use of leverage. An out-of-sample test shows that factor timing is persistent. Specifically, the top factor timing funds outperform the bottom factor timing funds with a significant 1% per annum. This constitutes 13% of the overall performance persistence in hedge funds. The findings are robust to the use of an alternative model, alternative factors, and controlling for the use of derivatives, public information, and fund size.