Contrarian Hedge Funds and Momentum Mutual Funds

37 Pages Posted: 15 Mar 2012  

Massimo Massa

INSEAD - Finance

Andrei Simonov

Michigan State University - Eli Broad Graduate School of Management; Gaidar Institute for Economic Policy; Centre for Economic Policy Research (CEPR); SITE

Shan Yan

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Date Written: March 13, 2012

Abstract

We study how hedge fund performance is related to the presence of mutual funds operating in the same asset class. We argue that hedge funds are able to exploit the constraints of the mutual funds related to both the high correlation between flows and value of investment and their tendency to cater to investors by invest in stocks that are 'hot'. Hedge funds exploit these features of the mutual funds, especially the domestic ones. We show that the performance of the hedge funds is significantly higher when mutual fund market coverage is higher. This effect is mostly concentrated among domestic mutual funds and is stronger the higher investment horizon of the hedge funds. A high presence of the mutual fund industry helps to explain 28% of the yearly hedge fund performance. Hedge funds are more likely to be 'alpha' in the presence of a high degree of mutual fund market coverage and their probability of survival is higher. Hedge funds employ contrarian strategies at the very moment in which mutual funds ride market expectations. The degree by which hedge funds react to changes in public information is directly related to the degree of mutual fund market coverage.

Suggested Citation

Massa, Massimo and Simonov, Andrei and Yan, Shan, Contrarian Hedge Funds and Momentum Mutual Funds (March 13, 2012). Available at SSRN: https://ssrn.com/abstract=2021499 or http://dx.doi.org/10.2139/ssrn.2021499

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Andrei Simonov (Contact Author)

Michigan State University - Eli Broad Graduate School of Management ( email )

645 N. Shaw Lane, 321 Eppley Center
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.andreisimonov.com

Gaidar Institute for Economic Policy ( email )

3-5 Gazetny Lane
Moscow, 125009
Russia

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

SITE ( email )

P.O. Box 6501
S-113 83 Stockholm, 11383
Sweden

Shan Yan

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

East Lansing, MI 48824-1121
United States

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