Style and Skill: Hedge Funds, Mutual Funds, and Momentum

Abstract

Classifying mandatory 13F stockholding filings by manager type reveals that hedge fund strategies are mostly contrarian, while mutual fund strategies are largely trend following. The only institutional performers---the 2/3 of hedge fund managers that are contrarian---earn alpha of 2.4% per year. Contrarian hedge fund managers tend to trade profitably with all other manager types, especially when purchasing stocks from momentum-oriented hedge and mutual fund managers. Superior contrarian hedge fund performance exhibits persistence and stems from stock-picking ability rather than liquidity provision. Aggregate short sales further support these conclusions about the style and skill of various fund manager types.

Keywords: Hedge funds, mutual funds, momentum, contrarian, anomalies, stock-picking skill

JEL Classification: G12, G14, G23