Abstract
The purpose of this paper is to present an empirical study of a set of hedge funds on recent periods. Alternative investments are now widely used by institutional investors and numerous studies highlight the main features of such investments. As they are in general poorly correlated with the main world indexes, traditional asset pricing models yield poor adjustments, partially because of potential non-linearities in pay-off functions. Some funds, however, exhibit high reward to variability ratios and can advantageously be incorporated in a portfolio in a diversification perspective. After describing the dataset, we classify the funds employing the Kohonen algorithm. We then cross the classification with the one based on the style of strategies involved, wondering if such categories are enough homogeneous to be relevant. The map of funds allows to characterize families of funds — whose conditional densities are different one to another — and to define a representative fund for each class. The structure of the network of funds is then described. In particular, we measure inter-class similarities and visualize them both on the network of funds and via a map of one-to-one distances between representative funds. Finally, we underline some of characteristics of classified fund families that may interest investors such as performance measurements.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Similar content being viewed by others
References
Agarwal V., Naik N. (2000-a), “Multi-period Persistence Analysis of Hedge Funds”, Journal of Quantitative and Financial Analysis, 35(3), September, 327–342.
Agarwal V., Naik N. (2000-b), “Characterizing Systematic Risk of Hedge Funds with Buy-and-hold and Option-based Strategies”, LBS working paper,IFA n°300, August, 51 pages.
Anderson T. (1984), An Introduction to Multivariate Statistical Analysis, John Wiley Editor, 2nd Edition, New York.
Blake E., Elton M., Gruber C. (1999), “Common Factors in Active and Passive Portfolios”, European Finance Review, 3(1), 53–78.
Blayo F., Demartines P. (1991), “Data Analysis: How to Compare Kohonen Neural Networks to Other Techniques?”, in Proceedings of IWANN’91 Conference, Springer, 469–476.
Bonanno G., Vandewalle N., Mantegna R. (2000), “Taxonomy of Stock Market Indices”, Physical Review E 62(6), December.
Bowden R. “The Ordered Mean Difference as a Portfolio Performance Measure”, Journal of Empirical Finance, 7, 195–223.
Brown S., Goetzmann W. (1997), “Mutual Fund Styles”, Journal of Financial Economics, 43, 373–399.
Brown S., Goetzmann W. (2001), “Hedge Funds with Styles”, NBER Working Paper n° w8173, March, 37 pages.
Chauveau T., Maillet B. (2001), “Performance with Restricted Borrowing: A Generalisation of Usual Measures”, in Proceedings of EFMA’01 Conference, Lugano, June, 46 pages.
Connor G., Korajczyk R. (1986), “Performance Measurement with the Arbitrage Pricing Theory: A New Framework for Analysis”, Journal of Financial Economics, 15 (3), 373–394.
Cottrell M., Fort J.C., Pagès G. (1995) “Two or Three Things that We Know about the Kohonen Algorithm”, in Verleysen M. (ed.), Proceedings of ESANN ‘84 Conference, D Facto, Bruxelles, 235–244.
Cottrell M., de Bodt E. (1996), “A Kohonen Map Representations to Avoid Misleading Interpretations”, in Verleysen M. (ed.), Proceedings of ESANN’96 Conference, D Facto, Bruxelles, 103–110.
Cottrell M., de Bodt E. (2000), “Bootstrapping Self-organizing Maps to Assess the Statistical Significance of Local Proximity”, in Verleysen M. (ed.), Proceedings of ESANN’00 Conference, D Facto, Bruges, 245–254.
Cottrell M., Girard B., Girard Y., Muller C., Rousset P. (1995-a), “Daily Electrical Power Curves: Classification and Forecasting Using a Kohonen Map, From Natural to Artificial Neural Computation”, Proceedings of IWANN’95 Conference,Springer, 1107–1113.
Cottrell M., Girard B., Girard Y., M. Mangeas (1995-b), `Neural Modelling for Time Series: A Statistical Stepwise Method for Weight Elimination“, IEEE Tr. on Neural Networks,6(6), November, 1355–1364.
Cottrell M., Fort J.-C., Pagès G. (1998-a), “Theoretical Aspects of the SOM Algorithm”, Neuro Computing, 21, 119–138.
Cottrell M., Girard B., Rousset P. (1998-b), “Forecasting of Curves Using a Kohonen Classification”, Journal of Forecasting,17(5/6), 429–439.
Dacorogna M., Gençay R., Müller U., Pictet O. (2001), “Effective Return, Risk Aversion and Drawdowns”, Physica, A 289, 229–248.
Daniel K., Grinblatt M., Titman S., Wermers R. (1997), “Measuring Mutual Fund Performance with Characteristics-based Benchmarks”, Journal of Finance, 52(3), July, 1035–1058.
de Bodt E., Grégoire Ph., Cottrell M. (1997), “Projection of Long-term Interest Rates with Maps”, in Deboeck G., Kohonen T. (eds), Visual Explorations in Finance with Self-organizing Maps, Springer, 24–38.
Deboeck G. (1997), “Picking Mutual Funds with Self-organizing Maps”, in Deboeck G., Kohonen T. (eds) Visual Explorations in Finance with Self-organizing Maps, Springer, 39–58.
DeRoon F., Nijman T., Terhost J. (2001), “Evaluating Style Analysis”, in Proceedings ofEFMA’01 Conference, Lugano, June, 33 pages.
Dibartomoleo D., Witkowski E. (1997), “Mutual Fund Misclassification: Evidence based on Style Analysis”, Financial Analysts Journal, Sept-Oct, 32–43.
Fung W., Hsieh D. (1997), “Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds”, Review of Financial Studies, 10(2), Summer, 275–302.
Fung W., Hsieh D. (1998), “Performance Attribution and Style Analysis. From Mutual Funds to Hedge Funds”, Working paper, Paradigm Financial Product, February, 41 pages.
Fung W., Hsieh D. (1999), “A Primer on Hedge Funds”, Journal of Empirical Finance,6(3), 309331.
Fung W., Hsieh D. (2000), “Performance Characteristics of Hedge Funds and Commodity Funds: Natural versus Spurious Biases”, Journal of Quantitative and Financial Analysis, 35(3), September, 291–307.
Fung W., Hsieh D. (2001), “The Risk in Hedge Fund Strategies: Theory and Evidence from Trend Followers”, Review of Financial Studies, 14(2), Summer, 313–341.
Grinblatt M., Titman S. (1989), “Portfolio Performance Evaluation: Old Issues and New Insights”, Review of Financial Studies, 2 (3), 393–421.
Gruber M. (2001), “Identying the Risk Structure of Mutual Fund Returns”, European Financial Management, 7 (2), June 2001, 147–160.
Jensen M. (1968), “The Performance of Mutual Funds in the Period 1945–1964”, Journal of Finance, 23, May, 389–416.
Jobson J., Korkie B. (1981), “Performance Hypothesis and Testing and with the Sharpe and Treynor Measures”, Journal of Finance, 36, September, 889–908.
Kohonen T. (2001), Self-organizing Maps, Springer Series in Information Sciences, XXX, 3rd extended edition, Springer, Berlin.
Leland H. (1999), “Beyond Mean-variance: Performance Measurement in a Nonsymmetric World”, Financial Analysts Journal, January-February, 27–36.
Lhabitant F.-S. (2001), “Assessing Market Risk for Hedge Funds and Hedge Funds Portfolios”, FAME Research Paper n°24, March, 40 pages.
Mantegna R. (1999), “Information and Hierachical Structure in Financial Markets”, Computer Physics Comunications, 121–122, 153–156.
Mitev T. (1998), “Classification of Commodity Trading Advisors (CTAs) using Maximum Likelihood Factor Analysis”, Journal of Alternative Investments, 1(2), Fall, 40–46.
Miller R., Gehr A. (1978), “Sample Bias and Sharpe’s Performance Measure: A Note” Journal of Financial and Quantitative Analysis 13, December, 943–946
Okunev J. (1990), “An Alternative Measure of Mutual Fund Performance”, Journal of Business Finance and Accounting,17(2), Spring, 247–264.
Pedersen Ch., Satchel’ S. (2000), “Small Sample Analysis of Performance Measures in the Asymmetric Response Model”, Journal of Quantitative and Financial Analysis, 35(3), September, 425–450.
Sharpe W. (1966), “Mutual Fund Performance”, Journal of Business, 34(1), Part 1, January, 119138.
Sharpe W. (1988), “Determining a Fund’s Effective Asset Mix”, Investment Management Review, 2 (6), 1988, 59–69.
Sharpe W. (1992), “Asset Allocation: Management Style and Performance Measurement” Journal of Portfolio Management, 18(2), 7–19
Sharpe W. (1994), “The Sharpe Ratio”, Journal of Portfolio Management, Fall, 49–58.
Sortino F., Price L. (1994), “Performance Measurement in a Downside Risk Framework” Journal of Investing, Fall, 59–65
Treynor J. (1965), “How to Rate Management of Investment Funds”, Harvard Business Review, January-February, 63–75.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2003 Springer Science+Business Media Dordrecht
About this chapter
Cite this chapter
Maillet, B., Rousset, P. (2003). Classifying hedge funds with Kohonen maps: A first attempt. In: Lesage, C., Cottrell, M. (eds) Connectionist Approaches in Economics and Management Sciences. Advances in Computational Management Science, vol 6. Springer, Boston, MA. https://doi.org/10.1007/978-1-4757-3722-6_12
Download citation
DOI: https://doi.org/10.1007/978-1-4757-3722-6_12
Publisher Name: Springer, Boston, MA
Print ISBN: 978-1-4419-5379-7
Online ISBN: 978-1-4757-3722-6
eBook Packages: Springer Book Archive