Academic Scholarship

The Performances of MBS Hedge Funds and Mutual Funds: A Puzzle

Journal of Investment Management, 6(4), 59- 89, December 2008

Journal of Investment Management Xiaoqing Eleanor Xu, Ph.D., CFA
Department of Finance
Anthony L Loviscek, Ph.D.
Department of Finance

MBS hedge funds have outperformed the Lehman MBS Index by an average of 210 basis points annually from 1992 through 2003. By comparison, MBS mutual funds have underperformed the Lehman MBS Index by an average of 141 basis points per year. This contrast in performance persists even after adjusting for total risk, as measured by Sharpe ratios. It also persists on a market risk-adjusted basis. Using CAPM single-index, illiquidity-adjusted, market-timing, and various multi-index and multi-factor models, we find that Jensens alpha is consistently negative and significant for MBS mutual funds but positive and significant for MBS hedge funds.


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