Systematic and Discretionary Hedge Funds: Classification and Performance Comparison

26 Pages Posted: 29 Dec 2018

See all articles by Hui-Ching Chuang

Hui-Ching Chuang

Yuan Ze University - College of Management

Chung-Ming Kuan

Department of Finance, National Taiwan University

Date Written: December 2, 2018

Abstract

In this paper we introduce an approach to building classifiers that bifurcate hedge funds into systematic and discretionary funds and evaluate their performance. This approach makes use of textual analysis and statistical learning methods that are free from subjective judgement of investment strategies. In our empirical study, we find that a random forest classifier yields the highest accuracy ratio, and that the funds classified as systematic, on average, result in higher raw returns, Sharpe ratios, and factor-adjusted returns than their discretionary counterparts. A bootstrap analysis also shows that the standardized alphas of a large portion of systematic and discretionary funds are statistically significantly different from zero, suggesting such performance is due to fund managers’ authentic investment skills, rather than their luck. Nonetheless, we find that systematic Equity Hedge funds are to be preferred to their discretionary counterparts because the standardized alphas of the former stochastically dominate those of the latter.

Keywords: Bootstrap Analysis, Random Forest, Statistical Learning, Textual Analysis

JEL Classification: G11, G14, G23, C38

Suggested Citation

Chuang, Hui-Ching and Kuan, Chung-Ming, Systematic and Discretionary Hedge Funds: Classification and Performance Comparison (December 2, 2018). Available at SSRN: https://ssrn.com/abstract=3299475 or http://dx.doi.org/10.2139/ssrn.3299475

Hui-Ching Chuang (Contact Author)

Yuan Ze University - College of Management ( email )

135, Yuan-Tung Rd.
Taoyuan, 320
Taiwan
886-972-735-021 (Phone)

Chung-Ming Kuan

Department of Finance, National Taiwan University ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan
886 2 3366-9541 (Phone)

HOME PAGE: http://homepage.ntu.edu.tw/~ckuan

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