•  
• Tweet
•  
•        Print
•  
•         Track Keywords
•  
• 

BNY study recommends hedge funds be classified using cluster analysis instead of traditional classification by strategy, new findings on performance and alpha

New Hedge Fund Classifications Would Promote Transparency and Boost Investor Confidence

Report spotlights common myths regarding hedge fund volatility, alpha- generation and risk

The convergence between hedge fund and equity market returns, combined with inconsistencies in hedge fund classification, could cause widespread confusion on how such funds should be used to diversify investment portfolios and result in unrealistic return expectations for investors, according to a study conducted by The Bank of New York Mellon and independent research firm Oxford Metrica.

The report, entitled Rethinking performance in the hedge fund industry, recommends that hedge funds be classified using cluster analysis instead of the traditional classification by strategy. Cluster analysis groups funds according to the observed behaviour in their returns, as opposed to management styles.

Traditional hedge fund indices are challenged by increasing demands to demonstrate transparency of the underlying funds and many hedge funds may change their strategy to maximise alpha. The resulting style drift is the cause of much difficulty in benchmarking and investor understanding.

In classifying 5,282 hedge funds, the study found that:

• Stable clusters perform better - some investo......................

  To view our full article Click here