Do fund managers time momentum? Evidence from mutual fund and hedge fund returns

Abstract

AbstractBy examining fund returns we find strong evidence that both hedge funds and mutual funds trade on momentum. Moreover, the average hedge fund has modest momentum timing skill, trading more aggressively when momentum profits are higher, while the average mutual fund does not. Momentum trading alone does not translate into superior performance. However, funds with momentum timing ability significantly outperform and the risk‐adjusted‐return‐difference between the top and the bottom timers is around 1.7% (1.3%) per year for hedge (mutual) funds. We provide further evidence that dynamic momentum strategies enhance fund performance, and momentum timing skills vary considerably with fund investment styles.