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Style Analysis Print E-mail

Manager style analysis

Manager style analysis presents a relatively new trend of hedge fund assessment frameworks. Though the “style analysis” term has been popular among investment advisors for a long time, typically, it involves a generalized benchmark and peer-to-peer comparison. While many existing style analysis platforms have been designed for mutual funds, which provide daily reports and a high degree of transparency, their applicability for monthly reporting and non-transparent investment vehicles like hedge funds becomes questionable.

Quant Style Analysis solutions are entirely different. Developed by hedge fund professionals and designed specifically for hedge funds, Quant Style performance attribution anlaysis opens a new dimension to a deeper and more sophisticated insight into manager trading strategies, thus giving investment professionals a competitive advantage in a better understanding of their investment process.

  • Need to rank managers over different market cycles: uptrends, downtrends or trendless?
  • Need to spot changes in the underlying asset allocation?
  • Need to find the driving market factors affecting fund performance?
  • Need to filter inter-correlated market factors?
  • Need to analyze a manager style drift over a time window?
  • Need to evaluate short return series?

If your answer is "Yes", then you should consider Quant Style analysis services.

Style Analysis: Problems & Solutions

Essential yet Overlooked Aspects and Problems

The problem of manager style identification derives from numerous biases and drawbacks in hedge fund data system. On the one hand, different vendors use different systems for the hedge fund classification, the rules of inclusion funds into indices, and commonly provide no verification of the declared trading styles.

On the other hand, hedge funds may behave in discordance with their corresponding indices, while similar indices from different vendors may be negatively correlated. For example, only 11.9% of the Long/Short equity funds evidence correlation of over 0.5 with their corresponding index, while 8.3% exhibit negative correlation.

The problem of hedge fund non-transparency adds yet another complication with the style analysis, because makes the underlying asset evaluation unavailable. To address this issue Quant Style utilizes the Principal Component Analysis and the multiple regression techniques virtually decomposing a fund performance model into a set of driving market factors.

Since most hedge funds report on a monthly basis, relatively short data series are available for the quantitative purpose. Therefore, more advanced statistical analysis techniques need to be applied to assure its significant confidence levels.

The bottom line for a hedge fund practitioner is simple: categorization of hedge fund styles based in their indices is highly misleading, while the common asset analysis tools may be hardly applicable due to low transparency and short return series. Quant Style Analysis module addresses the issues of style inconsistency providing a robust tool for an advanced strategy assessment.

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Common Approach: Drawbacks and Pitfalls

Using style categories of data providers. This widely used industry practice is by far the biggest mistake of the hedge fund style analysis. Setting aside numerous biases in index computations, hedge funds are not highly correlated with their corresponding indices; therefore, the style “labels” may not provide any added value for the assessment.
Using the mean-variance framework for the peer comparison purpose. Since hedge funds and FoF exhibit a high degree of non-normality of their distributions of returns, the mean-variance methodology is highly misleading when it comes to hedge funds.
Using software tools originally designed for mutual funds. In contrast with mutual funds, hedge funds are not transparent and, typically, report monthly. Therefore, mutual fund valuation techniques may be either inapplicable or provide insufficient statistical confidence levels due to short return series.
Diverse fund performance over different market trends. Despite the common beliefs of a high degree of hedge fund market neutrality, it is not so. Most strategies exhibit diverse performance across different markets, while apparent market neutrality is often a sign of using a wrong benchmark for analysis. A sophisticated style analysis should involve performance valuation over different market trends rather than taking a long time window.

Style Analysis Outlined

Addressing the above problems we offer the most sophisticated range of manager style analysis software tools and services specially tailored for hedge funds:

  • Multi factor performance analysis against indices and economic factors
  • Return based Static and Dynamic performance attribution analysis
  • Manager exposure analysis that is capable of identifying even "hidden asset allocations"
  • Identifying the closest peers from the fund universe
  • Dynamic style analysis (style changes over time)
  • Trend Segmentation™ analysis evaluating diverse manager performance over different market cycles
  • Identifying negatively correlated peers
  • Principal Component Analysis