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How Smart Are the Smart Guys? A Unique View from Hedge Fund Stock Holdings

How Smart Are the Smart Guys? A Unique View from Hedge Fund Stock Holdings Compared to mutual funds, hedge funds prefer smaller, opaque value securities, and have higher turnover and more active share bets. Decomposing returns into three components, we find that hedge funds are better than mutual funds at stock picking by only 1.32% per year on a value-weighted basis, and this result is insignificant on an equal-weighted basis or with price-to-sales benchmarks. Hedge funds exhibit no ability to time sectors or pick better stock styles. Surprisingly, we find only weak evidence of differential ability between hedge funds. Overall, our study raises serious questions about the perceived superior skill of hedge fund managers. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

How Smart Are the Smart Guys? A Unique View from Hedge Fund Stock Holdings

The Review of Financial Studies , Volume 22 (7) – Jul 1, 2009

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Publisher
Oxford University Press
Copyright
© The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org
Subject
Article
ISSN
0893-9454
eISSN
1465-7368
DOI
10.1093/rfs/hhp026
Publisher site
See Article on Publisher Site

Abstract

Compared to mutual funds, hedge funds prefer smaller, opaque value securities, and have higher turnover and more active share bets. Decomposing returns into three components, we find that hedge funds are better than mutual funds at stock picking by only 1.32% per year on a value-weighted basis, and this result is insignificant on an equal-weighted basis or with price-to-sales benchmarks. Hedge funds exhibit no ability to time sectors or pick better stock styles. Surprisingly, we find only weak evidence of differential ability between hedge funds. Overall, our study raises serious questions about the perceived superior skill of hedge fund managers.

Journal

The Review of Financial StudiesOxford University Press

Published: Jul 1, 2009

Keywords: JEL Classification G11 G23

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