Why Hedge Fund Strategies Don't Work for Most Investors

By David Randall is a staff writer for Forbes

Over the last few years, mutual fund companies have rolled out dozens of funds that mimic high-priced hedge funds. They’re often pitched to investors with the implication that the funds – which may take short positions or use leverage – will have higher returns than index funds, especially in a down market.

Unfortunately for investors, it doesn’t appear that these hedge fund strategies do much good. In a new paper, Jingzhi Huang of Penn State University and Ying Wang of SUNY-Albany examined the performance of 73 hedge fund-like mutual funds during the 2007 financial crisis. Even in a falling market, “the gain from the short positions is not sufficiently large to offset the loss from the long positions,” they noted, meaning that the funds have “no value for investors.”

A 2009 study by Morningstar reached the same conclusion. Of 8 absolute return funds on the market during the 2008 financial crisis, only one ended the year with a positive return, albeit a slight one at only 1.1%. Yet during the same year, the Vanguard Long-Term U.S. Treasury Fund was up 22%.


From Forbes published on May 5, 2010