CFR-Working Paper NO. 07-04
Hedge funds for
retail investors?
An examination of
hedged mutual funds
V. Agarwal • N.M. Boyson • N.Y. Naik
1
Hedge funds for retail investors?
An examination of hedged mutual funds
Vikas Agarwal, Nicole M. Boyson, and Narayan Y. Naik∗
First version: March 10, 2006
Current version: May 9, 2007
Abstract
Recently 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 hedge-
fund-like payoffs at a lower cost and within the comfort of a regulated environment.
JEL Classifications: G11, G12
Keywords: Hedge funds, mutual funds, hedged mutual funds, hybrid mutual funds
∗ Agarwal is at Georgia State University, Boyson is at Northeastern University, and Naik is at London Business
School. Agarwal also holds a Research Fellow position at the Centre for Financial Research (CFR), University of
Cologne. Corresponding author is Boyson: n.boyson@neu.edu, +1-617-373-4775. Contact details for the other two
authors are: e-mail: vagarwal@gsu.edu and Tel: +1-404-651-2699 (Agarwal), and e-mail: nnaik@london.edu and
Tel: +44-20-7000-8223 (Naik). We would like to thank Viral Acharya, Richard Brealey, Elroy Dimson, Patrick
Fauchier, Bill Fung, Francisco Gomes, Denis Gromb, Joop Huij, Robert Kosowski, Anna Pavlova, Jeffrey Pontiff,
David Stolin, René Stulz, Mat