Hedge fund manager timing and selectivity skill over time. A holdings-based estimate

Abstract

We study the performance of hedge fund firms from 1999 through 2017, employing a holdings-based approach to decompose overall performance into stock selection and three distinct timing abilities: market return, volatility, and liquidity. In particular, we introduce a liquidity timing ability for the first time using a holdings-based measure. In aggregate, we find evidence for stock picking skill that diminishes over time, but little evidence of timing ability. We find weak evidence that managers exhibit persistence in selectivity skill. At the individual hedge fund firm level, bootstrap analysis suggests that the top managers’ selectivity skill can be separated from luck.