Retail Hedge Funds

We study the performance and behavior of retail hedge fund investors by using a novel fund-level classification that is based on client composition data from eVestment. Retail hedge funds significantly outperform retail mutual funds and have a similar performance to institutional hedge funds. In our sample of retail hedge funds, 14.3% generate positive alpha, and performance is partly predictable: low systematic risk funds outperform, and poor performers persist. Retail investors respond aggressively to past returns and lack selection ability; however, they do not systematically make mistakes. These results suggest that retail hedge funds provide sophisticated investors with a valuable alternative to the underperforming retail mutual fund market.