Does The Seasonal Performance Anomaly Known As 'Sell In May And Go Away' Apply To Hedge Funds?

Oct 13 2011 | 12:51pm ET

By Tony Kristic, PerTrac -- There is an old, rather pessimistic adage around stock exchanges that goes, “Sell in May and go away.” This proverb forewarns investors to get out of the markets before summer begins. Why? Because equity performance will suffer in the next few months; because the next few months will be filled with vacation goers whose investing segment will empty their portfolios of stocks in order to achieve a more carefree summertime experience.

“But remember to come back in September,” goes the popular British clincher to the saying. In the U.S., however, the end of October is more fitting because it coincides with the beginning of holiday season, when we come back home for festivities. Following this thought, then, would it make sense to sell in May and to buy back in at the end of October? According to a 2002 American Economic Review Journal study titled, “The Halloween Indicator, Sell in May and Go Away: Another Puzzle,” the answer is definitely yes. This seasonal performance anomaly not only exists, but it does so on a wide and continuous scale, showing itself in 36 of 37 markets sampled and being noticed in the UK since 1694.

The anomaly applies directly to the performance of equities. However, with the majority of hedge funds investing in stocks, a spillover of this seasonal anomaly into the realm of the hedge fund universe is worth exploring.

The table below shows a total of 15 years (1996 – 2010) worth of hedge fund performance data, split by Summer through Fall seasons (May through October period) and the Winter through Spring seasons (November through April period); the funds have been further subcategorized based on their age and size into six indices.*

* For classifications of age and size, please see:Impact of Fund Size and Age on Hedge Fund Performance


Click to enlarge the chart

The table above shows the materialization of the seasonal anomaly, “sell in May and go away,” within the hedge fund universe over a period of 15 years. The percentage difference in the Cumulative RORs for all fund indices between their Winter through Spring (WISP) seasonal performance relative to their Summer through Fall (SUFA) seasonal performance are large—all exceeding 100% in outperformance and one even surpasses 200%. However, the outperformance by the WISP seasons is slightly mitigated by fund size. As AUM expands, the outperformance of the WISP seasons relative to the SUFA seasons begin to decline (from 164.98% within small funds, to 128.34% within mid-size funds, to 104.43% within large funds). A possible explanation for this drop in outperformance could be the change in portfolio composition that accompanies AUM growth.

Yet there really is no long term benefit to sitting out the May through October period because the returns on a cumulative basis are all still positive, albeit not nearly as strong as that of the November through April period. The main conclusion investors should draw from the effects of the calendar year anomaly on hedge fund performance is that an adequate analysis of one’s liquidity needs should be an integral part of any fund allocation process. Think about when you may need your money and then make sure it will be available at that point in time, because six months can make a world of difference.

Tony Kristic is part of  the research team at PerTrac.  The research team is managed by Lisa Corvese,  Managing Director of Global Business  Strategy.  Tony  is a  graduate in Economics and Finance from Bard College. 


In Depth

Q&A: Brevan Howard’s Charlotte Valeur Talks Strategy

Sep 18 2014 | 11:18am ET

Charlotte Valeur chairs the board of Brevan Howard Credit Catalysts, an LSE listed...

Lifestyle

Hedgies Rock Out For Children's Charity

Sep 15 2014 | 8:40am ET

It's that time of year again—when hedgies trade in their spreadsheets for guitars...

Guest Contributor

Volkered: How Financial Sector Reforms are Creating Opportunities for Hedge Funds

Sep 16 2014 | 11:28am ET

New regulations have dramatically curtailed proprietary trading activity in investment...

 

Editor's Note

    Get A Sneak Peak Of The Alpha Pages

    Aug 25 2014 | 11:21am ET

    As many of you know, FINalternatives was recently acquired by the owners of Futures magazine, a firm called The Alpha Pages LLC. Today marks the soft-launch of a new sister site for both publications. As its name suggests, The Alpha Pages will cover all types of alternative investments, going far beyond the more well-known ones such as hedge funds and private equity. Read more…

 

Futures Magazine

September 2014 Cover

The London Whale: Rogue risk management

Credit default swaps brought down the London Whale and cost JPMorgan $6.2 billion. Here is how it happened.

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.