Who is smarter? Evidence from extreme financial risk contagion in hedge funds and mutual funds

We investigate the extreme risk contagion of hedge funds and mutual funds, thereby comparing their performance, and studying whether hedge funds are smarter than mutual funds or vice versa. We construct the Copula-CoVaR model to measure the dynamic and nonlinear extreme risk contagion of hedge funds and mutual funds from January 1994 to April 2020. Our findings suggest that compared with mutual funds, hedge funds are subject to lower extreme risk contagion and offer higher average returns. This outperformance is robust in different crisis periods. Moreover, although almost all types of hedge funds outperform mutual funds, the characteristics of hedge funds have a different impact on the outperformance. Specifically, hedge funds adopting strategies of long/short equity hedge, event-driven, funds of funds, emerging markets, equity market neutral, multi-strategy, and global macro, funds with moderate activism, and illiquid hedge funds are smarter than mutual funds from the perspective of extreme risk contagion.