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Expert Analysis and Commentary
Larry Swedroe Mar 23, 2015
FOFs often have similarly elastic mandates, which give both FOFs and HFOFs more investment flexibility than traditional equity and bond mutual funds. This allows them to alter their asset allocations in response to changing market conditions. As a result, they provide a good sample to test market-timing skills.
Rodriguez found evidence of perverse market-timing skills in both FOFs and HFOFs. In the case of HFOFs, 75 percent of the sample exhibited negative timing skills, with about 25 percent of them being statistically significant at the 5 percent level. On the other hand, just 25 percent exhibited positive timing skills and just 5 percent of the total were statistically significant.
The results were similar for FOFs. The study found 64 percent of the sample showed negative market-timing coefficients, with about 11 percent being statistically significant at the 5 percent level.
While the statistical significance of Rodriguez’s results weren’t high, both the HFOF and FOF samples showed perverse timing ability. The evidence of perverse timing ability was stronger for HFOFs. The lesson for investors is: If even professionals fail to persistently add value through market-timing efforts, what are the odds that individual investors can do so?
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