Hedge Funds Versus Hedged Mutual Funds: An Examination of Equity Long/Short Funds; A Performance Update
David F. McCarthy
D.F. McCarthy LLC
Brian M. Wong
This paper updates the performance of those equity long/short mutual funds analyzed in “Hedge Funds Versus Hedged Mutual Funds: An Examination of Long/Short Funds” (The Journal of Alternative Investments, Winter 2014) (McCarthy, 2014). Section 1 of this paper focuses on the period July 2013 – December 2019, extending the analysis in McCarthy, 2014. This later period is characterized by an extended equity bull market. The analyses below find that these equity long/short mutual funds provide investment exposure similar to leading equity long/short hedge fund indexes. However, as a group, they underperformed the S&P 500 Index and traditional hedge fund indexes. It is further shown that none of the indexes considered in this paper (i.e. the Index of Equity Long/Short Mutual Funds, the HFRI Equity Hedge Fund Index, the DJ-CS L/S Equity Hedge Fund Index, or the CISDM Equity Long/Short Index) had positive risk adjusted returns over this later period. In addition, none of the 24 equity long/short mutual funds with full data for the period July 2013 – December 2019 had positive alpha. The paper also presents data on the lack of performance persistence across these mutual funds, analyzes the considerable change in assets of some of these funds, reports their closure rates, and notes the positive relationship between excess performance over the S&P 500 and net asset flows. Section 2 examines January 2020 – March 2020, a period characterized by a sharp equity market selloff. Data presented shows that these equity long/short mutual funds outperformed the S&P 500 during this three-month period (i.e. performed less poorly), though as a group they continued to underperform on a risk adjusted basis. In this period, though, a small number of individual mutual funds did add alpha. Also, extending the analyses over longer time frames ending March 31 2020, a small number of funds generated positive alpha. Finally, Appendix A provides performance data on equity long/short mutual funds begun after July 2013. The performance of this expanded universe of funds is materially the same as mutual funds begun before July 2013.
Accepted for Publication in The Journal of Alternative Investments; Fall 2020