Regardless of their underlying investment strategy, it’s reasonable to expect that all funds should be comparable at some common level.  The proof is in the pudding.  Or, as we like to say, it’s not about “hedge funds” or “mutual funds”, it’s all about alpha.

While the calculus for comparing hedge funds and mutual funds on an “apples to apples” basis seems to be slow in coming, a gaggle of academic studies over the past 2 decades have proposed performance measures that compare the value-added by mutual fund managers regardless of the underlying style.

One such metric – called “Active Share” – was proposed in 2008 by Martijn Cremers and Antti Petajisto of Yale (see previous post).  This metric is based on the divergence of the fund’s holdings to those of a passive index.  Cremers and Petajisto found that funds with a higher Active Share tended to perform better than those with a low Active Share.

The notion of Active Share is intuitive, but as you can imagine its calculation is data-intensive (you need to know the holdings of thousands of mutual funds in order to make any conclusions).

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