Liquid Alternative Mutual Funds versus Hedge Funds
Jonathan S. Hartley (University of Pennsylvania)
February 1, 2017
Despite the rapid rise of the number of liquid alternative mutual funds (LAMFs) available to retail investors in recent years, few studies have compared how their return and risk characteristics differ from their hedge fund counterparts across their entire history. Being among the first comprehensive studies to look at over two decades of LAMF performance, we use risk based factors to compare the performance of LAMFs to hedge funds both in aggregate and broken down by investment styles including equity long-short, market neutral, multi-strategy and managed futures. Overall, we find that LAMFs underperform hedge funds on average by 1-2% per year on a net-of-fee basis when controlling for standard risk factors. These findings provide important implications for investors seeking hedge fund-like returns while considering the importance of liquidity, transparency, and fees as well as for policymakers who have recently proposed imposing derivative position limits on 1940 Act investment vehicles.
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