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December 7, 2005
Edhec study compares FoFs, mutual funds
A new study from the Edhec Risk and Asset Management Research Centre finds that funds of funds add value through strategic allocation, but then destroy some of that value through their efforts at active management.
As study authors Noël Amenc and Mathieu Vaissié observe, this means that funds of funds have greater similarity with mutual funds than many investors (or managers) realize.
Mutual funds commonly follow a buy and hold strategy. Funds of funds, on the other hand, regularly make and review their picks of underlying funds and rotate their styles' representation in the over-all portfolio. The greater activism of funds of funds might suggest that the impact of beta drivers, i.e. strategic allocation, in the FoFs' results would be lower than in the mutual funds' results, and the impact of alpha, i.e. active management, would be higher.
Yet a regression analysis on a sample of 97 funds of funds in the period 1997-2004 didn't support this hypothesis. It indicated that 86 (89%) of the funds of funds in the sample added value at the allocation level but only 30 (31%) added value at the active management level.
Furthermore, the analysis indicates that for both mutual funds and FoFs, active management may destroy value. Strategy benchmarks account on average for 104% of mutual funds' total return, and 129% of FoFs total return.
"This seriously challenges the rationale behind investing in active funds since it seems that the more active the funds are, the more value they destroy," the authors wrote.
Noël Amenc is professor of finance, Edhec Business School, and director of the research center. Mathieu Vaissié is senior research engineer at the research center. An article detailing their findings will appear in the Journal of Investing in 2006.
Also, Edhec has just published the latest performance figures for the Edhec Investable Hedge Fund Indices, which indicate that the CTA Global Index outperformed all of the others for November, benefiting from favorable bond market conditions, and in spite of unfavorable commodity prices. That index was up 6.43%.
Most hedge fund strategies posted positive returns for November, Edhec's figures show. The convertible arbitrage index is the exception, down .20% for the month.
-HedgeWorld.com-
Posted by su at December 7, 2005 10:46 AM