Stylistic Differences across Hedge Funds as Revealed by Historical Monthly Returns
- 1
- 2
Abstract
This paper utilizes two clustering techniques to provide an objective method for classification of hedge funds. A data driven classification framework that utilizes monthly hedge fund returns as inputs, is shown to pro-vide better comparisons among fund categories and can help investors in identifying common factors that can lead to better diversification strategies. Our clustering results indicate that other than the managed fu-tures category, there are only three unique hedge fund styles. These three categories are the Equity Hedge, Fund of Hedge Funds and the Emerging Markets categories. None of the other hedge fund classifications such as Global macro, Distressed Securities, Merger Arbitrage, Convertible Arbitrage appear as a unique and independent category.
- W. F. Sharpe, “Asset allocation: Management style and performance measurement,” Journal of Portfolio Man-agement, Vol. 18, pp. 7–19, 1992.
- W. Fung and D. A. Hsieh, “Empirical characteristics of dynamic trading strategies: the case of hedge funds,” Re-view of Financial Studies, Vol. 10, No. 2, 1997.
- S. J. Brown and W. N. Goetzmann, “Mutual fund styles,” Journal of Financial Economics, Vol. 43, pp. 373–399, 1997.
- S. J. Brown and W. N. Goetzmann, “Hedge funds with style,” Journal of Portfolio Management, Vol. 29 (2, win-ter), pp. 101–112, 2003.
- B. Liang, “On the performance of alternative investments: CTAs, hedge funds and funds-of-funds,” Journal of Al-ternative Investment Management, 2004.
- W. R. Dillon and M. Goldstein, “Multivariate analysis methods and applications,” John Wiley and Sons Inc.,1984.
- J. D. Banfield and A. E. Raftery, “Ice floe identification in satellite images using mathematical morphology and clustering about principal curves,” Journal of American Statistical Association, Vol. 87, pp. 7–16, 1992.
- N. Das, “Hedge fund classification using K-means Clustering method,” International Conference in Com-puting in Economics and Finance, depts.washington.edu/sce2003/Papers/284.pdf, 2003.
- D. Jiang, C. Tang, and A. Zhang, “Cluster analysis for gene expression data: A survey,” IEEE Transactions on Knowledge and Data Engineering, Vol. 16, No. 11, pp. 1370–1386, 2004.
- A. Marathe and H. Shawky, “Categorizing mutual funds using clusters,” Advances in Quantitative Analysis of Fi-nance and Accounting, Vol. 7, pp. 199–211, 1999.
- J. A. Hartigan, “Clustering algorithms,” New York: John Wiley and Sons Inc., 1975.
- J. Ward, “Hierarchical grouping to optimize an objective function,” Journal of American Statistical Association, Vol. 58, pp. 236–244, 1963.
- V. Faber, “Clustering and the continuous k-means algo-rithm,” Los Alamos Science, Los Alamos National Labo-ratory, 1984.
- J. A. Hartigan, “Clustering algorithms,” New York: John Wiley & Sons, Inc, 1975.
- G.Martin, “Making sense of hedge fund returns: What matters and what doesn’t,” Derivative Strategy, 2000.