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New research confirms hedge-like mutual funds work

On a crummy day in the stock market, it’s another good time to think again about hedge-fund like opportunities for ordinary folks who can’t qualify for “real” hedge funds. Via finance professor Jim Mahar’s blog, check out a new paper (PDF file) examining the performance of hedging mutual funds.

Authors Vikas Agarwal of Georgia State University, Nicole Boyson of Northeastern University and Narayan Naik of the London Business School reviewed the performance of 26 mutual funds classified as using hedge fund like strategies by Morningstar and Lipper as well as another 26 identified by searching through fund investment strategies. The research, back to 1994, included 14 funds that are currently defunct. Then they compare the funds’ performance to a large group of similar hedge funds.

In the end, the hedge-fund like mutual funds trailed the true hedge funds by a substantial margin (over 4 percentage points a year after fees). But the hedged mutual funds outperform ordinary equity mutual funds by anywhere from 2.6% to 4.8% a year. The best performance in the group came from mutual funds run by managers with previous experience at actual hedge funds. Now that’s what I call a research paper with actionable results.

Need some more weekend reading? Money manager and blogger Paul Kedrosky points to a new article in MIT’s Technology review magazine looking at the troubles among quant fund from a highly analytical perspective. The article starts here.

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