A recent study conducted by researchers at Queen’s University in Ontario shows that, on average, domestic stock mutual funds that use hedge fund strategies such as leverage, options and/or shorting underperformed their peers, writes John Rekenthaler in a recent Morningstar article.
Using 17 years’ worth of U.S. mutual fund return data, the study delved into why this occurred. “As you may suspect,” writes Rekenthaler, “some of the shortfall owes to extra costs.” However, he says, that’s not the only issue. While the article emphasizes the “dangers” of mutual fund research that “consumes massive amounts of data, and returns summary statistics,” study findings suggest that mutual funds using less complex strategies showed stronger performance than their hedge fund-emulating peers.
Rekenthaler points out that complex strategies once served hedge funds well, when they could “exploit investment niches that rival funds, including hedge fund-like mutual funds, failed to pursue.” Since then, however, most have lost their edge and now lag mutual funds. However, the study “buttresses the argument that mutual fund managers who invest in flavors other than plain-vanilla have some proving to do. The odds do not look to be in their favor.”