Seeking Alpha, Getting Beta: A Comparison of Mutual and Hedge Fund Performance, Style Attribution and Active Management Fees

Abstract

Utilizing several models and regression analytics I compare factor attribution, strategies, and active management fees for 11,394 U.S. equity mutual funds and a matched sample of hedge funds from 1994 to 2010. There is modest evidence to support alpha delivery by mutual and hedge fund managers though this critically depends upon model specification. Quantile regression analysis with a robust bootstrap procedure demonstrates that typical regressions at the means do not adequately describe manager skill and factor attribution, and that these findings are not driven by the short-sample problem or backfill bias. Specifically, manager skill is demonstrably different at the 20th and 80th percentiles. Hedge funds are more actively managed than mutual funds, and thus investors pay similar fees to mutual funds and hedge funds for active management services even when taking hedge fund performance fees into consideration.