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Matthias Knab, Opalesque for New Managers:

Hedge funds and mutual funds are among the most prominent vehicles for investors seeking growth and diversification.

However, a critical question persists: which fund type is better equipped to handle extreme financial risk contagion?

A groundbreaking study titled "Who is smarter? Evidence from extreme financial risk contagion in hedge funds and mutual funds", published in The North American Journal of Economics and Finance, provides compelling evidence that hedge funds not only outperform mutual funds in terms of returns but also exhibit superior resilience during periods of market turmoil.

Key Findings:

1. Lower Extreme Risk Contagion in Hedge Funds

The study employs a dynamic Copula-CoVaR model to measure risk contagion from major financial markets to hedge funds and mutual funds from January 1994 to April 2020. The results reveal that hedge funds experience significantly lower extreme risk contagion compared to mutual funds. This suggests that hedge funds' flexible strategies and diversified investment approaches provide a buffer against systemic shocks.

2. Higher Average Returns

Beyond risk management, hedge funds also deliver higher average returns than mutual funds, reinforcing their appeal to investors seeking both performance and stability.

3. Robust Performance During Crises

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