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

51 Pages Posted: 8 Jan 2016 Last revised: 9 Oct 2016

See all articles by Mark Grinblatt

Mark Grinblatt

University of California, Los Angeles (UCLA) - Finance Area; Yale University - International Center for Finance; National Bureau of Economic Research (NBER)

Gergana Jostova

George Washington University - Department of Finance

Lubomir Petrasek

Federal Reserve Board

Alexander Philipov

George Mason University - Department of Finance

Date Written: July 16, 2016

Abstract

Institutional 13F stockholdings reveal stark differences between the investment philosophy and skill of hedge funds and mutual funds. Hedge funds tend to buy stocks with low past returns, while mutual funds tend to be trend followers. The two-thirds of hedge funds that follow contrarian strategies are the only fund category that generates a positive alpha, outperforming their risk- and characteristic-adjusted benchmarks by 2.4% per year. Contrarian hedge funds tend to be on the correct side of the trade in their interactions with all other fund types, and their most profitable trades are purchases of stocks sold by momentum mutual funds and momentum hedge funds. The superior performance of contrarian hedge funds is persistent and arises from strategies that are more complex than purchasing stocks with low past returns. Aggregate stock-by-stock short sales further support the existence of superior investment skills among contrarian hedge funds.

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

JEL Classification: G12, G14, G23

Suggested Citation

Grinblatt, Mark and Jostova, Gergana and Petrasek, Lubomir and Philipov, Alexander, Style and Skill: Hedge Funds, Mutual Funds, and Momentum (July 16, 2016). Available at SSRN: https://ssrn.com/abstract=2712050 or http://dx.doi.org/10.2139/ssrn.2712050

Mark Grinblatt

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1098 (Phone)
310-206-5455 (Fax)

Yale University - International Center for Finance

Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gergana Jostova

George Washington University - Department of Finance ( email )

2201 G St NW
Funger Hall, Suite 501
Washington, DC 20052
United States
202-994-7478 (Phone)

HOME PAGE: http://home.gwu.edu/~jostova

Lubomir Petrasek

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Alexander Philipov (Contact Author)

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

HOME PAGE: http://mason.gmu.edu/~aphilipo

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