Do Crypto Hedge Funds Time the Bitcoin Market?

Abstract

This article examines whether cryptocurrency (crypto) hedge funds successfully time the bitcoin market. The author uses a joint market-timing model to assess the bitcoin market return– and volatility–timing skills of crypto hedge fund managers. For a one-month holding period, the difference in the out-of-sample alpha between the top timers and bottom timers is 11.832% per month. The analysis shows that younger funds with shorter lockup periods tend to have stronger bitcoin market return–timing skills. Moreover, funds with lower redemption periods tend to exhibit stronger bitcoin market volatility–timing skills. The author also observes that crypto hedge funds demonstrate stronger bitcoin market–timing skills during market downturns, likely because of bitcoin being a safe-haven asset in contrast to traditional stock market investments. The findings are important for private investors who are considering crypto hedge funds as an alternative investment.