TY - JOUR T1 - Classifying Single-Manager Hedge Funds: <em>Some New Insights</em> JF - The Journal of Alternative Investments SP - 38 LP - 61 DO - 10.3905/jai.2016.19.2.038 VL - 19 IS - 2 AU - Florian Böhlandt AU - Eon Smit AU - Niel Krige Y1 - 2016/09/30 UR - https://pm-research.com/content/19/2/38.abstract N2 - A persistent problem for hedge fund researchers presents itself in the form of inconsistent and diverse style classifications within and across database providers. In this article, single-manager hedge funds from the Hedge Fund Research (HFR) and Hedgefund.Net (HFN) databases are classified on the basis of a common factor extracted using the factor axis methodology. It is assumed that the returns of all sample hedge funds are attributable to a common factor that is shared across hedge funds within one classification, and a specific factor that is unique to a particular hedge fund. In contrast to earlier research and the application of principal component analysis (Fung and Hsieh [1997, 2001]), factor axis seeks to determine how much of the covariance in the dataset is attributable to common factors (commonality). Factor axis largely ignores the diagonal elements of the covariance matrix, and orthogonal factor rotation maximizes the covariance between hedge fund return series. In an iterative approach, common factors are extracted until all return series are described by one common and one specific factor. Prior to factor extraction, the series are tested for autoregressive moving-average processes, and the residuals of such models are used in further analysis to improve upon squared correlations as initial factor estimates. The methodology is applied to the July 1995 to June 2010 timeframe. The results indicate that the number of distinct style classifications is reduced in comparison with the arbitrary self-select classifications of the databases.TOPICS: Real assets/alternative investments/private equity, style investing, manager selection ER -