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Media Contact:
Cynthia Corzo
305-348-1664
ccorzo@fiu.edu
BizNews.fiu.edu
@FIUBusiness
 
Timing manufacturing stocks delivers for hedge funds, a Florida International University study reveals
 
MIAMI (July 30, 2019) – Hedge funds that are better able to time the market ahead of positive and negative news within the manufacturing industry outperform competitors, reveals new research from Florida International University’s College of Business (FIU Business).
 
Timing the manufacturing industry-specific news pays off in the form of higher future risk-adjusted returns, larger future capital inflows, and higher probability of survival for those skilled hedge fund managers and, ultimately, for their investors.
 
“We think that earnings news is a good proxy for industry-specific returns. Moreover, manufacturing industry’s earnings surprises exhibit the highest persistence among all industries analyzed,” said study co-author Mustafa Caglayan, associate professor of finance at FIU Business. “This makes it easier for skilled hedge fund managers to forecast the future earnings surprises in the sector and hence time the manufacturing industry-specific returns and earn superior returns on a consistent basis.”
 
Investors can redeem those higher returns by investing in the best industry-timing hedge funds, he added.
 
Researchers examined 11,040 hedge funds across 12 industries - including telecommunications, retail, energy, business equipment, and durable as well as non-durable consumer products – testing if hedge funds had the ability to time industry-specific returns and whether this could predict the variation in future returns among different funds.
 
Timing the manufacturing industry-specific returns through companies’ earnings surprises consistently generated the best future fund performance.
 
In addition to generating higher returns, the best manufacturing industry-timing hedge funds experience larger inflows of capital and as a result have a higher chance of survival in the following six to 12-month period.
 
“Business cycle indicators have a strong predictive power over both the direction and magnitude of future earnings surprises, particularly in the manufacturing industry,” said Caglayan. “This again makes it easier to predict the future earnings surprises.”
 
By contrast, for mutual funds, researchers didn’t find evidence of a positive link between manufacturing industry timing ability and future performance. 
 
“Hedge funds can move quickly,” said Caglayan. “They aren’t heavily regulated, don’t have concentration requirements and have more flexibility in their portfolio holdings and investment strategies, including the use of leverage and short-sell. These make them better able to time industry-specific returns compared to mutual funds.”
 
The paper was co-authored by Caglayan with Turan G. Bali, professor of business administration at McDonough School of Business, Georgetown University; Stephen J. Brown, professor of finance at New York University Stern School of Business; and Umut Celiker, assistant professor of finance at Cleveland State University.
 
A copy of the research paper is available upon request.

 
-FIU-

About FIU Business:
Florida International University’s College of Business plays a pivotal role in the development of global business leaders. With more than 10,000 undergraduate and graduate students, FIU Business is widely recognized for its expertise in international business, real estate, data analytics, entrepreneurship, healthcare management, and a broad range of financial services. For more information about FIU Business, visit http://business.fiu.edu


About FIU:
Florida International University is Miami’s public research university and in less than five decades has become a top 100 public university, according to U.S. News & World Report’s Best Colleges. FIU is focused on student success and research excellence, with nearly $200 million in annual research expenditures. The Next Horizon fundraising campaign is furthering FIU’s commitment to providing students Worlds Ahead opportunities. Today FIU has two campuses and multiple centers, including sites in Qingdao and Tianjin, China, and supports artistic and cultural engagement through its three museums: Patricia & Phillip Frost Art Museum, the Wolfsonian-FIU, and the Jewish Museum of Florida-FIU. FIU is a member of Conference USA, with more than 400 student-athletes participating in 18 sports. The university has awarded more than 330,000 degrees to many leaders in South Florida and beyond. For more information about FIU, visit www.fiu.edu.

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