Market Timing with ETF Options

I provide new evidence on market timing by studying ETF option holdings of hedge funds. I find that market option holdings are economically significant in terms of their impact on the market exposure of the funds. Further, I find significant time variation in market option holdings, which could be due to market timing activity. I measure market timing ability as average risk-adjusted return on market option holdings. I find that market timing ability is close to zero for the average fund but is negative for heavy option users. In the cross-section, I find that some funds have significant negative market timing ability, which I distinguish from bad luck by bootstrapping market returns