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After 2009, many investors turned to hedged mutual funds for downside protection. This article examines their performance and finds negative risk-adjusted returns.


Overview

Hedged mutual funds flourished following the 2007–2009 financial crisis. They became particularly popular with financial advisors because of their alleged downside protection. Did these funds deliver what they promised? We examine the performance of these funds with a focus on the post-2009 period. While they generated positive alphas before the crisis, we find that this abnormal performance vanishes in the post-2009 period as their strategies became increasingly crowded due to the above popularity. We show that flows to hedged mutual funds are negatively related to investor sentiment, implying that investors use these funds as a hedge against downside risk.

About the Authors

Asli Eksi

Asli Eksi is with the Perdue School of Business, Salisbury University, Salisbury, MD.

Hossein Kazemi