Constructing a diversified hedge funds portfolio is very much associated with the degree of complementarity/substitutability of alternative fund strategies/styles, which are self declared by fund managers. To this extend, an obvious and important question related to the safe pick by investors of a specific fund strategy is: ‘if and to what extend the fund managers declared strategy and its investment style are compatible with what actually their performance states?’. If yes, then the investors’ decision making is well informed, otherwise they run to risk of constructing a homogeneous rather than heterogeneous portfolio of funds. The purpose of this paper is, by utilizing clustering techniques -k-means and two-step -, to identify the compatibility between managers self-declaration of fund strategy/style and what the data actually reveal. The framework used is based on data driven classification, covering 2,853 hedge funds of all strategies and styles for the period 2000-2009 with monthly returns, standard deviations, skewness, kurtosis and % of positive months as inputs. The results suggest that both, k-means and two-step clustering, produce similar outcomes and that all funds strategies and styles are classified in eight clusters. Moreover, the results indicate that, other than convertible arbitrage, emerging markets and event driven fund strategies, which are mainly classified in one cluster, none of the other hedge fund strategies appear as a homogeneous category. The latter suggests that investors should be very careful when building up their portfolio of hedge funds because the self-declaration of fund managers’ strategy could be misleading.
Comments: 25 Pages. Published in The Hellenic Open Business Administration Journal; https://hobajournal.wordpress.com/
[v1] 2018-07-01 03:30:35
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