Volume 5, Number 2, Second Quarter 2007
This paper examines the timing ability of hedge funds covering various investment categories. We extend the Treynor-Mazuy (1966) and Henriksson-Merton (1981) market timing models to a multiple market framework and propose the concept of a focus market in which a fund trades most actively. Concentrating on the focus market enables us to parsimoniously apply conditional multifactor models. With a large sample of hedge funds during 1994-2002, we show evidence of significant timing ability in the focus markets including bond, currency, and equity markets at both the category and the fund levels. Tests of performance persistence present some supportive evidence over a short horizon.