Should Investors Invest in Hedge Fund-Like Mutual Funds? Evidence from the 2007 Financial Crisis

44 Pages Posted: 2 Jan 2010 Last revised: 10 Jun 2014

See all articles by Jing-Zhi Huang

Jing-Zhi Huang

Pennsylvania State University - University Park - Department of Finance

Ying Wang

State University of New York at Albany - School of Business

Date Written: March 1, 2010

Abstract

Recently many mutual funds have created hedge fund-like products for marketing to retail investors. This study empirically examines the value added for investors during the 2007 financial crisis from hedge fund-like mutual funds, including 130/30, market neutral, and long/short equity funds. We find that based on the information ratio, all market neutral funds and top 75% of long/short equity funds have higher risk-adjusted returns than a passive index fund over the crisis period. However, based on either unconditional or conditional four-factor alphas, we find no evidence that hedge fund-like mutual funds in general add any value for investors, although there is evidence of genuine skills not purely due to luck by a few top 130/30 and long/short fund managers. The reason for the overall under-performance in the crisis period is that while short positions taken by these funds do generate alpha, the gain from their short positions is not sufficiently large to offset the loss from their long positions. Finally, the abnormal performance of short positions is found to be attributable to managers’ characteristic-adjusted and industry-adjusted stock selection skills.

Keywords: Hedge fund-like mutual funds, 130/30 funds, market neutral funds, long/short funds, financial crisis

Suggested Citation

Huang, Jing-Zhi Jay and Wang, Ying, Should Investors Invest in Hedge Fund-Like Mutual Funds? Evidence from the 2007 Financial Crisis (March 1, 2010). Journal of Financial Intermediation Vol. 22, Iss. 3, pp. 482-512, 2013. Available at SSRN: https://ssrn.com/abstract=1530242 or http://dx.doi.org/10.2139/ssrn.1530242

Jing-Zhi Jay Huang

Pennsylvania State University - University Park - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://www.personal.psu.edu/jxh56

Ying Wang (Contact Author)

State University of New York at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

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