Hedge Funds for Retail Investors? An Examination of Hedged Mutual Funds

Abstract

Recently, there has been rapid growth in the assets managed by “hedged mutual funds”— mutual funds mimicking hedge fund strategies.We examine the performance of these funds relative to hedge funds and traditional mutual funds. Despite using similar trading strategies, hedged mutual funds underperform hedge funds. We attribute this finding to hedge funds’ lighter regulation and better incentives. Conversely, hedged mutual funds outperform traditional mutual funds. Notably, this superior performance is driven by managers with experience implementing hedge fund strategies. Our findings have implications for investors seeking hedge-fund-like payoffs at a lower cost and within the comfort of a regulated environment.

Keywords: Hedge funds, mutual funds, hedged mutual funds, hybrid mutual funds

JEL Classification: G11, G12