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AbstractRecently there has been a rapid growth in the assets managed by "hedged mutual funds" -mutual funds mimicking hedge funds strategies. In this paper, we examine the performance of these funds relative to hedge funds and traditional mutual funds. We find that despite their use of similar trading strategies, hedged mutual funds underperform hedge funds. We attribute this evidence to lighter regulation and better incentives faced by hedge funds. In contrast, hedged mutual funds outperform traditional mutual funds. Most interesting, this superior performance is largely driven by managers with experience in implementing hedge fund strategies. Our findings have important implication for investors seeking hedgefund-like payoffs at a lower cost and within the comfort of a regulated environment.
Hedge funds for retail investors? An examination of hedged mutual fundsFairly recently, a number of mutual fund companies have begun offering funds that use hedge-fund-like trading strategies designed to benefit from potential mispricing on the long as well as the short side. Recognizing that these funds are unique, Morningstar and Lipper have created the new style categories of "Long/Short Equity" and "Market Neutral" to classify these funds. Despite their use of hedge fund strategies, these "hedged" mutual funds are regulated by the Securities and Exchange Commission (SEC) in exactly the same way as "traditional" mutual funds. They are available to retail investors, with an average required minimum investment of just $5,000, while hedge funds are only available to accredited and/or qualified investors with a minimum investment of roughly $1 million. 1 We believe that hedged mutual funds will play an increasingly important role in the field of investment management as they provide access to hedge-fund-like strategies with the fee structure, liquidity, and regulatory requirements of mutual funds.2 This paper conducts an indepth analysis of this new class...