Publication Type
Working Paper
Publication Date
11-2012
Abstract
We examine the trading skill of hedge funds using transaction-level data. After accounting for trading commissions, we find no evidence that the trades of the average hedge fund outperform across holding periods ranging from one month to one year. However, bootstrap simulations indicate that the trading skill of the top 10% of hedge funds cannot be explained by luck. Similarly, we find that the performance of top hedge funds persists and much of this persistence stems from intra-quarter trading skill. Skilled hedge funds tend to be short-term contrarians and their profits are largely concentrated in smaller, more illiquid stocks. Our findings suggest that while the average hedge fund is unskilled, there are a small minority of skilled funds who persistently create value through liquidity provision.
Keywords
Hedge funds, transaction data, trading skill, short term trading, liquidity provision
Discipline
Finance and Financial Management
First Page
1
Last Page
56
Citation
JAME, Russell.
(2012). Research Collection BNP Paribas Hedge Fund Centre.
, 1.
Available at: https://ink.library.smu.edu.sg/bnp_research/18
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Comments
The research was partially funded by BNPP Hedge Fund Centre at Singapore Management Centre. Copy made available with permission of the authors.