Do Hedged Mutual Funds Hedge?

Mutual funds using hedge fund strategies, known as “hedged mutual funds,” have experienced rapid growth in recent years. In theory, these funds should provide a source of diversification for retail investors however the 2008 credit crisis negated the expected benefits of many equity diversifiers. Between 2004 and 2009, hedged mutual funds underperform hedge funds using similar strategies. In contrast, hedged mutual funds outperform the S&P 500 although funds with a market neutral strategy underperform the risk-free rate. These findings suggest that, when compared to a long-only equity strategy, hedged mutual funds offer retail investors improved performance in bear markets.