Two thirds of hedge funds create genuine value through contrarian strategies, choosing well among cheap and beaten-down stocks, according to a new study of their holdings.

In contrast, two thirds of mutual funds are playing the momentum game, buying what’s gone up and selling what seems to be going down. These mutual funds, in contrast to contrarian hedge funds, aren’t really earning their keep.

The study, released in January, is ground-breaking, according to its authors, because it relies on 13F filings, which are holdings disclosures that money managers above a certain size are obliged to release to the U.S. Securities and Exchange Commission.

That not only allows for funds to be sorted between styles based on what they actually do, it also eliminates many of the pitfalls of hedge fund performance management statistics, which rely on voluntary reports of returns.

“Contrarian hedge funds’ success derives from their managers’ superior stock-picking skills - the ability to pick the right losers among stocks with similar characteristics,” write Mark Grinblatt of UCLA, Gergana Jostova of George Washington University, Lubomir Petrasek of the Federal Reserve Board and Alexander Philipov of George Mason University. (

“We find performance persistence only among outperforming hedge funds - there is no evidence of performance persistence among underperforming hedge funds and outperforming or underperforming mutual funds and other institutional investors.”

The study examined 13F filings from a 1998-2012 sample period, and included analysis of 589 unique mutual fund advisors and 1,342 hedge fund advisors.

Contrarian hedge funds outperformed a passive benchmark by 2.4 percentage points a year using returns adjusted for size, the book-to-market of stocks involved and momentum. Two thirds of that outperformance came from buying, as opposed to selling stocks.

Turning to mutual funds, two thirds follow a momentum strategy, meaning they try to surf along with the waves of stocks’ movements. These funds tend to stay with this style. Momentum mutual funds do outperform contrarian mutual funds, while contrarian hedge funds outperform all groups including momentum hedge funds.

Momentum is a well-known and much studied anomaly in financial markets but it looks as if mutual funds following it are adding little. Once you adjust their returns for the effects of momentum, a momentum index return, if you like, momentum mutual funds do about as well as their mutual fund contrarian peers.