Blog - Investing Notes

September 5, 2006 - Hedge Funds Strongest Around the Turns of Odd Years?

Do hedge funds eliminate, or even reverse, seasonal effects in the returns of the stock market? In his September 2006 paper entitled "Seasonality in Hedge Fund Strategies", Yan Olszewski investigates general seasonal effects for various hedge fund strategies. Using monthly excess return data during 1990-2005 for 30 of the 37 equally-weighted Hedge Fund Research strategy indexes encompassing over 1600 funds, he finds that:

• In aggregate, hedge funds tend to perform best in December and January, and worst from August to October.
• Hedge funds do better in odd years than in even years. (A national election year effect?)
• Arbitrage, relative value and market neutral strategies are the most consistent in providing positive alpha throughout the year and throughout odd-even years.

The following tables (extracted from the paper) offer granularity with respect to these findings.

Calendar quarters: Aggregate returns are strongest for the fourth and first quarters. Returns are weakest for the third quarter.

Offset calendar quarters (Quarter 1 is November-January): Aggregate returns are strongest for the first quarter (November-January), and weakest for the fourth quarter (August-October).

Calendar months: Aggregate returns are strongest for December, January, May and November. Returns are weakest for August, September, October and July.

Calendar months in odd and even years: Aggregate results are weaker for most months during odd years than during even years.

Odd years:

Even years:

In summary, hedge funds in aggregate perform best around the turn of the year and during odd-numbered years. This seasonality is little different from that of the overall stock market.

For related research, see our Trading Calendar and Blog Synthesis: Calendar Effects. See especially the offset quarterly breakdown of S&P 500 index returns across the Presidential cycle in our blog entry of 12/30/05 and the discussion of joint inflation-stock returns seasonality in our blog entry of 11/14/05.