Retail Hedge Funds
45 Pages Posted: 18 Feb 2021 Last revised: 1 Aug 2022
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Retail Hedge Funds
Date Written: August 1, 2022
Abstract
We use a novel fund-level measure to identify 877 retail hedge funds. On average, retail funds do not underperform, either on an absolute basis or relative to institutional funds. In the cross-section, 14.3% of retail funds produce positive alpha and performance is predictable: funds with low systematic risk outperform, and poor performing funds persistently underperform. Turning to investor behavior, retail investors are "hot money" and are more likely to divest following poor performance. They do not exhibit selection ability but are not "dumb money," and they also chase alpha and ignore (or avoid) common factor returns.
Keywords: Retail investors, hot money, hedge funds, investor sophistication
JEL Classification: G23, G51, K22, D63
Suggested Citation: Suggested Citation