A PERFORMANCE COMPARISON OF HEDGE FUNDS, HEDGED MUTUAL FUNDS AND HEDGE FUND ETFS

Hedged mutual funds and hedge fund ETFs are new entrants to the market thatallow individual investors to invest in funds using hedge fund strategies. In this paper, we study the performance of these two funds relative to the traditional hedge funds to see if the three asset classes are comparable investments. We use four performance measurement models, including CAPM, Fama French three factor model, Carhart four factor model and Fung and Hsieh eight factor model, to test the fund performance for the period of 2004 to 2015. Our study shows hedge funds on average generate a positive alpha during the entire testing period and the sub-periods. Whereas, most hedged mutual funds constantly underperform the traditional benchmarks. During the period of April 2009 to January 2015, when hedge fund ETFs exist in the market, we find hedge fund ETFs outperform the hedged mutual funds, but underperform the traditional hedge funds. The conclusion may be justified by the hedge fund managers’ asset allocation skills and the ability to quickly react to the macroeconomic factors.