Are Hedged Mutual Funds Good For Investors?

Hedge funds offer investors a lot of alternatives to profit or hedge in financial markets. Unfortunately only accredited investors can invest in them. If your net worth isn’t north of $1 million or your income is less than $200K you can’t have the privilege of giving hedge fund managers 2% of your assets and 20% of gross returns. Hedged mutual funds are trying to offer the same strategies for lower fees and they only require an average minimum investment of $5000. They are also regulated by the SEC, providing investors more protection. This seems too good to be true. Can hedge mutual funds really deliver hedge fund like returns? Are hedged mutual funds good for investors?

In 2009 Vikas Agarwal, Nicole M. Boyson, and Narayan Y. Naik published an academic paper in Journal of Financial and Quantitative Analysis answering this question. The title of the paper is “Hedge Funds for Retail Investors? An Examination of Hedged Mutual Funds”. Here is what they found:

Recently, there has been rapid growth in the assets managed by “hedged mutual funds”— mutual funds mimicking hedge fund strategies.We examine the performance of these funds relative to hedge funds and traditional mutual funds. Despite using similar trading strategies, hedged mutual funds underperform hedge funds. We attribute this finding to hedge funds’ lighter regulation and better incentives. Conversely, hedged mutual funds outperform traditional mutual funds. Notably, this superior performance is driven by managers with experience implementing hedge fund strategies. Our findings have implications for investors seeking hedge-fund-like payoffs at a lower cost and within the comfort of a regulated environment.

The paper states that “controlling for differences in risks, fund characteristics, and past performance, HMFs underperform HFs by approximately 3.3% per year on a net-of-fee basis”. The paper also found that “despite higher fees and turnover, HMFs outperform TMFs by as much as 4.8% per year on a net-of-fee basis when controlling for differences in risks, fund characteristics, and past performance”. There you have it. Hedge funds are still better investments than hedged mutual funds, and hedged mutual funds are better investments than mutual funds. However, this is true on the average and these statements were valid for the period prior to 2009. Hedge fund performance has been declining and new types of hedged mutual funds came to existence recently.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!