Abstract
This paper makes use of the Bayesian method to evaluate hedge fund managers’ selectivity,
market timing and outperformance skills separately, and investigates their persistence from
January 1995 to June 20101. We divide this sample period into four overlapping sub-sample
periods that contain different economic cycles. We define a skilled manager as a manager who
can outperform the market in two consecutive sub-sample periods. We employ Bayesian linear
CAPM and Bayesian quadratic CAPM to generate skill coefficients during each sub-sample
period. We found that fund managers who possess selectivity skills can outperform the market at
7.5% significant level if and only if the economic conditions that governed the financial market
during the period between sub-sample period2 and sub-sample period3 remain the same.