"Non Mutual" was the accusation when The Prisoner was pilloried for not having enough community spirit. Mutual funds are being accused of being non-mutual by Ross Miller in his paper that decomposes an actively managed mutual fund into an active market neutral part and a passive part that looks just like an index. What he finds is that expense ratios on the active part look like about 7% if you consider most funds only have about 10% of their portfolio actively managed and that means the 1% vs. the .3% annual fees for managed vs. index fund has to be attributed just to the managed portion. This is great for hedge funds that if their fund is going up 10% a year only charge 2% fees + 20% of the 10% profits or 4% altogether. That's quite a bit less than the comparable active mutual fund.

This is make quite a stir in financial circles.

Er...wasn't that "un"-mutual?

That's right! Rand is UNMUTUAL for getting it wrong!!!

That's right! Rand is UNMUTUAL for getting it wrong!!!

Um... Not really. Sam posted it, not Rand...

Anti-mutual is what it is now.

So how do hedge funds manage under the same metric? I suspect that any successful hedge fund will have a high correlation with indices as well. My bet is that the corresponding "mean active expense ratio" for hedge funds is in the double digits. And frankly the single digit equivalent for "active" mutual funds sounds like a decent deal to me.

The real question is whether you can rationally (given the information at your disposal) expect more return on investment under mutual funds, hedge funds, index funds (with almost no "active" component) or by investing by yourself. This study doesn't cut it IMHO.