Measuring the value of active fund management: The case of hybrid mutual funds

Purpose -The purpose of this paper is to examine the value of active fund management using a sample of hybrid mutual funds. Design/methodology/approach - Instead of using traditional risk-adjusted measures, the paper employs an alternative attribution return methodology where the actual monthly fund return is compared to the return that would have been earned by the indexing strategy that best reflects the fund's prior month allocation. Value is measured by defining a fund's attribution return as the difference between a fund's actual month t return and the return that would have been generated in month t by the indexing strategy that most closely approximates the fund's month t-1 portfolio allocation. Findings - It is found that hybrid funds as a group do not add value and that this underperformance does not appear to be driven by the poor performance of non-surviving funds. However, these funds perform significantly better than the style benchmark under weak vs strong stock market conditions. This performance difference between bull and bear market conditions suggests some hedge fund-like downside protection that may offer a reason why investors choose these funds despite the funds’ average underperformance and despite their higher costs relative to index funds. Originality/value -The contribution of this paper is twofold. First, it concentrates on hybrid mutual funds, which despite a surge in their interest over the last five years have attracted very little academic study. Second, in the implementation of its non-traditional performance measure, it employed daily fund returns, stock market indices and bond market indices as opposed to the monthly or quarterly data used in other related studies.