Classifying Hedge Funds with Kohonen Maps: A First Attempt

26 Pages Posted: 20 Feb 2002

See all articles by Bertrand B. Maillet

Bertrand B. Maillet

EMLyon Business School (Paris Campus)

Patrick Rousset

Centre For Research on Education, Training and Employment (CEREQ)

Date Written: November 2001

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 be advantageously 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 homogenous 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.

Keywords: Kohonen maps, Classfication, Multidimensional Data Analysis, General Non-linear Models, Hedge Funds, Fund-Picking, Performance Measurements

JEL Classification: G10, G12, G13

Suggested Citation

Maillet, Bertrand B. and Rousset, Patrick, Classifying Hedge Funds with Kohonen Maps: A First Attempt (November 2001). Available at SSRN: https://ssrn.com/abstract=300924 or http://dx.doi.org/10.2139/ssrn.300924

Bertrand B. Maillet (Contact Author)

EMLyon Business School (Paris Campus) ( email )

23 Avenue Guy de Collongue
Ecully, 69132
France

Patrick Rousset

Centre For Research on Education, Training and Employment (CEREQ) ( email )

10, Place De La Joliette
BP 21321
13567 Marseille Cedex 02
France

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