A Performance Update—Hedge Funds versus Hedged Mutual Funds: An Examination of Equity Long–Short Funds

Abstract

This article presents a performance update for the equity long–short mutual funds that were first described and analyzed in McCarthy (2014), extending that analysis to the period from July 2013–December 2019. The analyses confirm that the equity long–short mutual funds provide investment exposure similar to leading equity long–short hedge fund indexes. However, in this later time period, they underperformed the S&P 500 Index and traditional hedge fund indexes. In addition, none of the indexes (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 [as modified]) had positive risk-adjusted returns, as measured by alpha over this later period, and none of the 24 equity long–short mutual funds with full data for the period from July 2013–December 2019 had positive alpha. This article also presents data on the lack of performance persistence across the equity long–short mutual funds, analyzes the considerable change in asset sizes of some of these funds, reports on the closure rate of equity long–short mutual funds over this time period, and notes the positive relationship between excess performance over the S&P 500 Index and equity long–short mutual fund net asset flows. Finally, the appendix broadens the analysis to include equity long–short mutual funds started after July 2013. The performance results from this expanded universe of funds is materially the same as the original sample of mutual funds from 2013.

TOPIC: Mutual fund performance

Key Findings

This article examines equity long-short mutual funds over the period from July 2013–December 2019. It extends an earlier analysis of these same mutual funds through June 2013 (McCarthy 2014) and finds the following:

• a) Equity long–short mutual funds continue to provide investment exposure similar to equity long–short hedge funds.

• b) Equity long–short mutual funds have substantially underperformed the S&P 500 Index in absolute return terms over the analysis period (3.4% p.a. vs. 13.7% for the S&P 500). Moreover, as a group, they generated negative alpha over this period (−4.0% p.a.). Further, no individual equity long–short mutual fund included in the analysis earned a positive alpha over this six-and-a-half-year period.

• c) Equity long–short mutual funds performed similarly to, although slightly behind, leading equity long-short indexes over the analysis period.

• d) Over the analysis period, no persistence in individual equity long–short mutual fund manager performance was identified. Additionally, as a group and individually, equity long–short mutual funds had difficulties maintaining their asset levels. Only one of the largest five funds in 2013 was still among the five largest at the end of 2019.

The article also includes performance data for equity long–short mutual funds begun after June 2013. The results are largely indistinguishable from the funds begun before that date. That is, this expanded universe of funds also substantially underperformed the S&P 500 Index, as a group did not earn positive alpha, and underperformed leading hedge fund indexes.