We propose a new measure of managerial skill based on the maximum monthly returns of hedge funds over a fixed time interval and test if this new measure (pMAX) is an indicator of greater managerial talent leading to superior fund performance. We find significant cross-sectional variations and persistence in pMAX. Our main finding indicates that hedge funds in the highest pMAX quintile generate 8.4% more annual returns compared to funds in the lowest pMAX quintile. After controlling for a large set of fund characteristics, risk factors, and past performance measures, the positive relation between pMAX and future returns remains highly significant. We also show that the directional and semi-directional hedge fund managers can predict and exploit changes in the market and economic conditions by increasing (decreasing) fund exposures to risk factors when market risk and/or economic uncertainty is high (low). However, mutual funds do not have market- or macro-timing ability. Thus, we find no evidence of a significant link between managerial talent of mutual fund managers and their future returns. Overall, the results indicate that the predictive power of pMAX over future returns for hedge funds is driven by superior timing ability and better managerial skills of hedge funds.