Performance of Alternative Mutual Funds: The Average Investor's Hedge Fund

Abstract

Alternative Mutual Funds (AMFs) follow strategies similar to those of hedge funds and seek returns uncorrelated with the market. We analyze the performance of AMFs for the period January, 1998 through December, 2011 using the Carhart four-factor model and the Fung-Hsieh seven-factor model. Our results indicate that most AMFs have not been able to create any value for their investors over the period of our study. Furthermore, the performance of these funds was even worse during the recent financial crisis. However, on a pre-expense basis, some of these funds are able to follow the market (with alphas insignificantly different than zero). In addition we show that the managers of these funds do not have success in market-timing or selectivity and none of the fund categories display any performance persistence.

JEL Classification: G11, G14