Due to the complexity and heterogeneity of hedge fund strategies, assessing their performance is a challenging task. Reminiscent of the mutual fund industry, the literature has evolved in the direction of refining traditional measures (e.g. the Sharpe ratio) or introducing new ones. This paper offers a new approach, based on the Principal Component Analysis (PCA), to uncover the relevant information for performance measurement, quantify, and combine it into a unique rank. In addition, this paper assesses the ability of each individual hedge fund to raise the efficiency of a balanced portfolio by means of an extension of the Modigliani – Modigliani index. Finally, for illustration purposes, the methodology is applied for assessing the recent performance of the nascent Italian hedge fund industry
Bramante, R., Cipollini, A., Manzini, A., Assessing the Performance of the Hedge Funds Market: An Application to the Italian Hedge Funds Industry, <<SSRN Electronic Journal>>, N/A; (N/A): 1-28. [doi:10.2139/ssrn.995607] [http://hdl.handle.net/10807/30130]
Assessing the Performance of the Hedge Funds Market: An Application to the Italian Hedge Funds Industry
Bramante, Riccardo;
2007
Abstract
Due to the complexity and heterogeneity of hedge fund strategies, assessing their performance is a challenging task. Reminiscent of the mutual fund industry, the literature has evolved in the direction of refining traditional measures (e.g. the Sharpe ratio) or introducing new ones. This paper offers a new approach, based on the Principal Component Analysis (PCA), to uncover the relevant information for performance measurement, quantify, and combine it into a unique rank. In addition, this paper assesses the ability of each individual hedge fund to raise the efficiency of a balanced portfolio by means of an extension of the Modigliani – Modigliani index. Finally, for illustration purposes, the methodology is applied for assessing the recent performance of the nascent Italian hedge fund industryI documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.