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Generalised style analysis of hedge funds

Author

Listed:
  • V Agarwal

    (London Business School)

  • N Y Naik

    (Associate Professor of Finance and Citibank Research Fellow at the London Business School)

Abstract

This paper attempts to shed light on the ‘black box’ called hedge funds via the style analysis technique developed by Sharpe (1992). The conventional style analysis cannot be directly applied to hedge funds as it imposes two constraints: first, the style weights have to be non-negative, and secondly, they have to add up to 100 per cent. In addition, the conventional style analysis does not provide any information about the statistical significance of the style weights. In this paper, we conduct a generalised style analysis of various hedge fund strategies by relaxing the constraints of the conventional style analysis, and examine the significance of style weights, as in Lobosco and DiBartolomeo (1997). We find that the generalised style analysis approach is more robust for estimating the risk exposures of hedge funds that take short positions in various asset classes and typically hold a significant part of their portfolio in cash.

Suggested Citation

  • V Agarwal & N Y Naik, 2000. "Generalised style analysis of hedge funds," Journal of Asset Management, Palgrave Macmillan, vol. 1(1), pages 93-109, July.
    • Handle: RePEc:pal:assmgt:v:1:y:2000:i:1:d:10.1057_palgrave.jam.2240007
    DOI: 10.1057/palgrave.jam.2240007
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    Citations

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    Cited by:

    1. Lambert, Marie & Platania, Federico, 2020. "The macroeconomic drivers in hedge fund beta management," Economic Modelling, Elsevier, vol. 91(C), pages 65-80.
    2. Massimo Guidolin & Alexei Orlov, 2020. "Are Unconventional Monetary Policies a Priced Risk Factor for Hedge Fund Strategies?," BAFFI CAREFIN Working Papers 20146, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    3. Astrid Ayala & Szabolcs Blazsek, 2018. "Equity market neutral hedge funds and the stock market: an application of score-driven copula models," Applied Economics, Taylor & Francis Journals, vol. 50(37), pages 4005-4023, August.
    4. Juan Matallin-Saez, 2007. "Portfolio performance: factors or benchmarks?," Applied Financial Economics, Taylor & Francis Journals, vol. 17(14), pages 1167-1178.
    5. Weng, Haijie & Trück, Stefan, 2011. "Style analysis and Value-at-Risk of Asia-focused hedge funds," Pacific-Basin Finance Journal, Elsevier, vol. 19(5), pages 491-510, November.
    6. Boney, Vaneesha & Comer, George & Kelly, Lynne, 2009. "Timing the investment grade securities market: Evidence from high quality bond funds," Journal of Empirical Finance, Elsevier, vol. 16(1), pages 55-69, January.
    7. Juan Carlos Matallin-Saez, 2011. "On causality in the size-efficiency relationship: the effect of investor cash flows on the mutual fund industry," Applied Economics, Taylor & Francis Journals, vol. 43(27), pages 4069-4079.
    8. Andrew Mason & Frank McGroarty & Steve Thomas, 2012. "Style analysis for diversified US equity funds," Journal of Asset Management, Palgrave Macmillan, vol. 13(3), pages 170-185, June.
    9. Rodrigo Dupleich & Daniel Giamouridis & Spyros Mesomeris & Nima Noorizadeh, 2010. "Unbundling common style exposures, time variance and style timing of hedge fund beta," Journal of Asset Management, Palgrave Macmillan, vol. 11(1), pages 19-30, April.
    10. Andrea Beltratti & Claudio Morana, 2006. "Net Inflows and Time-Varying Alphas: The Case of Hedge Funds," ICER Working Papers 30-2006, ICER - International Centre for Economic Research.
    11. Rajna Gibson & Sébastien Gyger, 2007. "The Style Consistency of Hedge Funds," European Financial Management, European Financial Management Association, vol. 13(2), pages 287-308, March.
    12. Stephanos Papadamou & Nikolaos A. Kyriazis & Lydia Mermigka, 2017. "Japanese Mutual Funds before and after the Crisis Outburst: A Style- and Performance-Analysis," IJFS, MDPI, vol. 5(1), pages 1-20, March.
    13. Andrew Mason & Frank McGroarty & Steve Thomas, 2013. "Complementary or contradictory? Combining returns-based and characteristics-based investment style analysis," Journal of Asset Management, Palgrave Macmillan, vol. 14(6), pages 423-438, December.
    14. Claudio Conversano & Domenico Vistocco, 2010. "Analysis of mutual funds' management styles: a modeling, ranking and visualizing approach," Journal of Applied Statistics, Taylor & Francis Journals, vol. 37(11), pages 1825-1845.
    15. Luis Vicente & Luis Ferruz, 2005. "Performance persistence in Spanish equity funds," Applied Financial Economics, Taylor & Francis Journals, vol. 15(18), pages 1305-1313.
    16. Ferruz Agudo, Luis & Vicente Gimeno, Luis A., 2005. "Are Style Factors exclusive, exhaustive and independent in Spanish Domestic Equity Funds?/¿Son los factores de estilo exclusivos, exhaustivos e independientes en los fondos de inversión españoles de r," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 23, pages 495-506, Agosto.
    17. Sam Nasypbek & Scheherazade S Rehman, 2011. "Explaining the returns of active currency managers," BIS Papers chapters, in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 211-256, Bank for International Settlements.

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