Detecting switching strategies in equity hedge funds returns

Equity hedge funds are thought to effectively operate market timing by implementing switching strategies conditional on market circumstances. In this article the authors use only the reported monthly returns on a set of funds to infer the type of switching strategies they follow, if any, as well as their switching times. A set of regime-switching models for each equity hedge funds returns against various benchmarks are estimated; subsequently the authors attempt to answer the following general questions: What proportion of equity funds seem to have switching strategies in place? Which are the most popular instruments for switching strategies? And what is the relationship between the switching times of different funds? The general methodology applied in this article may be useful to investors who wish to detect, from only reported returns, whether and when a particular fund has been timing the market.