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Much has been written lately about hedged mutual funds, also called liquid alternative mutual funds. Many of these articles note the increasing number of products available to investors, the strong growth in assets, and the "big name" new entrants, such as Blackstone and PIMCO. Some, in a general and cursory way, have attempted to describe the underlying investment strategies employed in these liquid alternative mutual funds, presuming in some cases little familiarity of hedge fund strategies among retail investors and their advisors.
The intent of this article is to offer a perspective on these products and to shed some light on questions commonly raised by investors: Are liquid alternative mutual funds reasonable substitutes for private placement hedge funds? Do they offer investors similar market exposures? How have they performed relative to comparable hedge funds? Without giving too much away, the answer, unsurprisingly, depends on which style of liquid alternative mutual fund you are examining.
This article focuses on equity long/short mutual funds. This is the largest category of liquid alternative mutual funds, and the analysis performed in this article provides a framework for analysis of other liquid alternative strategies. The article begins by identifying the liquid alternative mutual funds that use this strategy in a form similar to most equity long/short private placement hedge funds. Properly identifying a comparable universe of equity long/short mutual funds is critical to the analyses and conclusions of this study. As described more fully in the following sections, the comparative data used herein are based on a review of each individual liquid alternative mutual fund to identify those specific funds that employ an equity long/short strategy comparable to those found in private placement hedge funds and, as a result, dominate equity hedge fund indexes.
After providing a general profile of the equity long/short mutual funds examined in this analysis (e.g., size, start dates, sponsorship), I use a variety of metrics to compare these funds' equity exposure and investment performance with those of private placement equity long/short hedge funds and indexes. Based on the data analyzed, this study concludes that, as a group, diversified singlemanager equity long/short mutual funds do not perform materially differently from comparable private placement hedge funds, at least as represented by leading hedge fund indexes.
BACKGROUND
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