The Canadian Hedge Fund Industry: Performance and Market Timing

Abstract

We analyze the risk and return characteristics of Canadian hedge funds based on a comprehensive database we compiled. We find that Canadian hedge funds have higher risk-adjusted performance and different distributional characteristics relative to the global hedge fund indices. We investigate market timing by Canadian hedge funds and find that they do not time the Canadian or global stock and bond markets, but hedge funds in the Managed Futures strategy group time the commodity market. These results are robust to parameter instability and structural changes in the model. We also illustrate the impact of using local and global risk factors to analyze the performance of local investment firms. JEL Classification: G11, G12, G23There is a large body of academic literature analyzing the risk and return characteristics of the hedge fund industry. One of the main topics of this research has been identifying factors that can explain hedge fund performance and provide insights into hedge fund investment strategies (Lo 2010). Our paper contributes to the currently small literature on the performance of international hedge funds and reports geographical differentiation in the performance of investment strategies by hedge funds.We find that Canadian hedge funds tend to outperform their global peers (i.e., hedge funds from all over the world) in the corresponding strategy categories. Next, we follow the literature on hedge funds' nonlinear exposure to risk factors and study option-like features of Canadian hedge fund strategies, such as market timing (Fung and Hsieh 1997a). Although measuring hedge funds' timing ability is an important question by itself, hedge fund performance is measured more reliably if it is adjusted for timing strategies as Jensen's alphas

Market Timing and Selectivity: An Empirical Investigation of European Mutual Fund Performance

“…The author intended to verify if the market timing skill of sector fund managers could be captured through general market benchmarks and stated that, although the market timing estimate was negative for most funds irrespective of the benchmark, the selectivity estimates were positively affected by benchmarks that were more closely related to the fund's strategy. These results could be related with the findings of (Klein et al, 2015).…”

“…Using both the (Henriksson & Merton, 1981) and the (Treynor & Mazuy, 1966) models, (Klein, Purdy, Schweigert, & Vedrashko, 2015) examined a sample of 198 Canadian hedge funds from 1998 to 2011. Their work was supported by the idea that Canadian hedge fund managers are conscious and have sufficient knowledge regarding commodity markets because Canada's economy is highly dependent on energy sources.…”