Tuesday, June 23, 2009
Mutual Funds match Hedge Funds
from Barrons. Hedge funds may be no better than mutual funds, after all IN THE WORLD OF HIGH FINANCE, EQUITY-MUTUAL-FUND managers have the reputation of being plain-vanilla, plodding and, well, dull investors, while their hedge-fund cousins have enjoyed the image of highflying, swashbuckling marauders. It is boring "buy and hold" versus higher-turnover, more active and opaque hedging strategies. But guess what? A new study led by Prof. John Griffin of the department of finance at the University of Texas at Austin raises serious questions about the perceived superior skills of hedge-fund managers. He was "a little bit surprised" by the findings. "I expected more hedge-fund outperformance," he says, especially since mutual-fund managers charge an average 1% of assets while hedgies charge 1% to 2% of assets and take 20% of the profit. Using a sample of 300 hedge-fund firms and much of the mutual-fund universe, Griffin compared the performance of the funds' equity positions based on their filings with the Securities and Exchange Commission, both against each other and passive benchmarks. Individual hedge funds aren't required to report their positions, but their holding companies are. Previous studies have focused on reported returns, but they didn't take into account the possibility of hedgies' "smoothing" their results. A hedgie, for example, might match a 5% gain by the market in one month, yet report just a 2.5% gain -- hoarding the extra for the following month, when the broad market loses 2%, as does his fund. That month he can claim a 0.5% gain. The 0.5% gain is called alpha, the excess return a hedge fund provides over the performance of the broad market with the same risk. But it is phony alpha. A hedge fund, however, can't cook the performance of stocks in its portfolios. That is why Griffin believes his study merits attention. He found that hedge funds did better than mutual funds at picking stocks, but the gain over the average mutual-fund return was just 1.32% per year. That's before fees! Griffin also found that "hedge funds exhibit no ability to time sectors or pick better stock styles" than mutual funds. "Surprisingly," he says, his group found only weak evidence that the stars in the hedge-fund world produce greater returns than the hedgies of the hoi polloi. The lesson for potential hedge-fund investors: Don't make an alpha bet.