Even hedge funds can get “seasonal affective disorder” (SAD)

“Seasonality in Hedge Fund Strategies”

Ever felt fatiguing and a little down this time of year?  Turns out you’re not alone.  Your hedge fund is also affected by the changing of the seasons – except hedge funds seem to get the blues in the late summer and fall – Q3 according to this research paper.

This report also shows that hedge funds do better in December than in other months of the year (see related posting “Yes, Virginia, there is hedge fund alpha” from December 24th).

Researchers examined returns of the 30 strategies contained in the HFRI hedge fund index.  They found that most displayed some sort of non-zero correlation to each month of the year.  While many of these non-zero correlations were statistically insignificant, several months seemed to be significantly correlated with positive returns in various strategies.  The following chart was derived from their research (Table 3 in the paper):

And so the authors proclaim:

“…most returns for hedge funds come in the last two months of the year and the first month of the next year.”

We thought this was just an interesting anomaly at first.  But then it began to dawn on us that such seasonality could have a dramatic impact on what portion of returns one might flag as alpha and what portion one might determine is beta.  It’s a little like the “regime switching” studies where alpha is measured against bull and bear market “regimes” individually, rather than across an entire historical dataset.  But in this case, their would be 12 recurring regimes.

The alpha-centric implications of these findings were also not lost on the authors of this report:

“It is interesting that this seasonality is almost identical to that found in global equity markets. This raises questions as to whether hedge funds really provide alpha or are they just leveraged beta investments.”

Unfortunately the cause of this anomaly is unclear, say the authors.  But next time your hedge funds feel a little down in August or October, have some sympathy for them.  It’s not all their fault.

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