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

Abstract

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“…Mutual funds, accessible to a larger array of investors, attempt to mimic hedge funds without utilizing leverage or short-selling (predicting that the price of a security would go down) the market. Still, these hedged mutual funds do not offer the same performance or niche as regular hedge funds [7]. Additionally, the inability of mutual funds to short the stock market results in a significant fall in value during times of recession [8].…”

“…Therefore, many seek financial assistance from funds that actively manage their clients' money. For example, current middle-class individuals could allocate their capital to mutual funds (which are managed by a group of financial experts), which pool investor money (with variable minimum investment requirements usually between $1,000 and $5,000) and invest in stocks and bonds without the use of leverage or short selling [7]. In contrast to hedge funds, mutual funds are strictly regulated by the Securities and Exchange Commission to follow these rules, in order to mitigate risk for investors.…”

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“…In the only other study on HMFs that we are aware of, Agarwal et al (2009) showed that the superior performance of HMFs over traditional mutual funds (TMFs) was driven by managers with hedge fund experience, and that HMFs have significantly higher turnover and Although the Eta model concerns itself with economic risk and not risk associated with returns, we will nevertheless examine returns of MERP via traditional measures. Further inspection of MERP and HMFs are therefore conducted on their conditional volatilities and their conditional correlations with the SPX, which are estimated, respectively, by the GARCH and DCC models.…”