Hedge Fund Performance, Classification With Machine Learning, and Managerial Implications

EFMA 2023

92 Pages Posted: 5 Jul 2023 Last revised: 1 Mar 2024

See all articles by Emmanouil Platanakis

Emmanouil Platanakis

University of Bath - School of Management

Dimitrios Stafylas

University of York - The York Management School

Charles Sutcliffe

University of Reading - ICMA Centre

Wenke Zhang

University of Bath - School of Management; Brunel University London

Date Written: February 17, 2024

Abstract

Prior academic research on hedge funds focuses predominately on fund strategies in relation to market timing, stock picking, and performance persistence, among others. However, the hedge fund industry lacks a universal classification scheme for strategies, leading to subjective fund classifications and inaccurate expectations of hedge fund performance. We use machine learning techniques to address this issue. First, it examines whether the reported fund strategies are consistent with their performance. Second, it examines the potential impact of hedge fund classification on managerial decision making. Our results suggest that for most reported strategies there is no alignment with fund performance. Classification matters in terms of abnormal returns and risk exposures, although the market factor remains consistently the most important exposure for most clusters and strategies. An important policy implication of our study is that the classification of hedge funds affects asset and portfolio allocation decisions, and the construction of the benchmarks against which performance is judged.

Keywords: Hedge funds, classification, machine learning, alternative investments

JEL Classification: C38, C58, G23

Suggested Citation

Platanakis, Emmanouil and Stafylas, Dimitrios and Sutcliffe, Charles M. and Zhang, Wenke, Hedge Fund Performance, Classification With Machine Learning, and Managerial Implications (February 17, 2024). EFMA 2023, Available at SSRN: https://ssrn.com/abstract=4498649 or http://dx.doi.org/10.2139/ssrn.4498649

Emmanouil Platanakis (Contact Author)

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Dimitrios Stafylas

University of York - The York Management School ( email )

Freboys Lane
Heslington
York, North Yorkshire YO10 5DD
United Kingdom

Charles M. Sutcliffe

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Wenke Zhang

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Brunel University London ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

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