Your Survival Guy watched Dumb Money this week. I can’t say I’m in the camp of the day traders. They’re just as bad as the hedge fund guys in terms of hoping for prices to go up. That’s not investing. That’s speculation. And a lot of money is invested in it. Everyone thinks they’ve found the better mousetrap until they don’t. Look at the returns over the past 15 years of the alternative mutual funds (which use hedge-fund-like strategies) below. You can see high costs, plenty of volatility, and weak performance. No thanks.
The Wall Street Journal’s Derek Horstmeyer reports on hedge fund performance, writing:
While hedge funds largely remain the domain of high-net-worth, accredited investors, ordinary investors have been able to dabble in the once-exclusive strategies via alternative mutual funds.
These funds—which feature such strategies as long/short equity and relative value—aim to deliver benchmark-beating returns while minimizing volatility.
But just because you can invest like the wealthiest investors doesn’t mean you’ll enjoy the same success or withstand underperformance as deeper-pocketed investors. So which type of strategy has fared best over the past 15 years on a risk-adjusted basis?
To tackle this issue, my research assistants (Kurshat Gheni and Heyuan Li) and I pulled all U.S.-dollar denominated alternative mutual funds listed in the U.S. We then separated them according to their Morningstar category of focus. To be included in the final sample, there needed to be 20-plus mutual funds in a particular category.
The final list of alternative mutual-fund categories we examined: market-neutral, event-driven, macro trading, multistrategy, option-based arbitrage, relative-value arbitrage, systematic trend, global-focused and merger arbitrage.
With these categories in hand, we then explored the average annualized returns, the volatility and the average fees within each group.
The first interesting finding: Across the board, the alternative funds much more resembled short to midterm bond mutual funds in their risk and return characteristics. Over all categories, the average performance of alternative mutual funds over the past 15 years was an annualized return just above 3% with volatility, or standard deviation of returns, of 4.3% (low risk and low return).
On the top end, the best-performing group was merger arbitrage with an annualized return of 4.6% over the past 15 years and annualized volatility of 4.3%. Most of the other categories of alternative mutual funds we researched had similar risk-return profiles to these numbers.
