Hedge funds for retail investors? An examination of hedged mutual funds

Agarwal, V, Boyson, N and Naik, N (2007) Hedge funds for retail investors? An examination of hedged mutual funds. Working Paper. London Business School BNP Paribas Hedge Fund Centre Working Paper Series.

Abstract

Recently there has been a rapid growth in the assets managed by “hedged mutual funds” – mutual funds mimicking hedge funds strategies. In this paper, we examine the performance of these funds relative to hedge funds and traditional mutual funds. We find that despite their use of similar trading strategies, hedged mutual funds underperform hedge funds. We attribute this evidence to lighter regulation and better incentives faced by hedge funds. In contrast, hedged mutual funds outperform traditional mutual funds. Most interesting, this superior performance is largely driven by managers with experience in implementing hedge fund strategies. Our findings have important implication for investors seeking hedgefundlike payoffs at a lower cost and within the comfort of a regulated environment.