Benchmarking the Market Timing Skills of Hedge Funds: An Adjustment from Option Greeks

This paper shed new lights on hedge fund industry managers
who claim to time the market. We revisit the Treynor and Mazuy
model to infer the nature of the gamma trading of hedge funds
style and follow the framework of Hübner (2016) who provide an
option-based adjustment of alpha for option-like payoffs. We feature
convex and concave payoffs for directional and non-directional
bets. Our model has applications in performance analysis as we
show that adjusting for the convex nature of trades in hedge funds,
the alpha of funds with ”smart” market timing ability (long call
payoff) is, on average, increased by 0.70% per month.