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RFS Advance Access originally published online on May 1, 2009
Review of Financial Studies 2009 22(7):2531-2570; doi:10.1093/rfs/hhp026
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© 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

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

John M. Griffin
University of Texas at Austin

Jin Xu
Zebra Capital Management, LLC

Send correspondence to John M. Griffin, Department of Finance, 1 University Station B6600, Austin, TX 78712. E-mail: john.griffin{at}mail.utexas.edu

JEL Classification: G11, G23


  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.

We wish to thank an anonymous referee, Zhiwu Chen, David Hsieh (the FMA discussant), Roger Ibbotson, Owen Lamont, Matthew Spiegel (the editor), Will Goetzmann, James Griffin, Antti Petajisto, Geert Rouwenhorst, Louis Scott, Laura Starks, Sheridan Titman, Christian Tiu, and seminar participants at the Atlanta Fed Conference in April 2006, the November 2005 Financial Management Association Meetings in Chicago, University of Lisboa in Portugal, University of Texas at Austin, and the Yale School of Management. We also thank Nick Hirschey and Kelvin Law for diligent research assistance.


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