Detecting Switching Strategies in Equity Hedge Funds
Carol Alexander () and
Anca Dimitriu ()
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Anca Dimitriu: ICMA Centre, University of Reading
ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading
Equity hedge funds are thought to effectively operate market timing by implementing switching strategies conditional on market circumstances. In this paper we use only the reported monthly returns on a set of funds to infer the type of switching strategies they follow, if any, as well as their switching times. A set of regime-switching models for each equity hedge funds' returns against various benchmarks are estimated; subsequently we answer the following general questions: What proportion of equity funds seem to have switching strategies in place? Which are the most popular instruments for switching strategies? And what is the relationship between the switching times of different funds? The general methodology applied in this paper may be useful to investors that wish to detect, from only from their reported returns, whether and when a particular fund has been timing the market.
Pages: 11 pages
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Published in Journal of Alternative Investments 2005, 8:1, 7-13
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