Changing investment styles: style creep and style gaming in the hedge fund industry
Article first published online: 21 DEC 2006
Copyright © 2006 John Wiley & Sons, Ltd.
Intelligent Systems in Accounting, Finance and Management
Volume 14, Issue 4, pages 157–177, October/December 2006
How to Cite
Baghai-Wadji, R., El-Berry, R., Klocker, S. and Schwaiger, M. (2006), Changing investment styles: style creep and style gaming in the hedge fund industry. Int. J. Intell. Syst. Acc. Fin. Mgmt., 14: 157–177. doi: 10.1002/isaf.275
- Issue published online: 2 APR 2007
- Article first published online: 21 DEC 2006
Notwithstanding their common features, hedge funds remain an extremely diverse asset class. Information on fund styles is important for numerous purposes, such as portfolio construction, performance attribution and risk management. With fund self-declaration being prone to (strategic) misclassification, return-based taxonomies grouping funds along similarities in realized returns provide a useful alternative. We provide a consistent classification system of homogeneous groups of hedge funds based on self-organizing maps. Whereas some fund categories such as managed futures are largely consistent in their self-declared strategies, others, especially so-called ‘equity hedge’ funds, display no or very limited return similarities. Furthermore, we also find evidence of fund managers performing undisclosed changes of their trading style over time. Those funds that misclassified themselves once are particularly likely to change their trading style again. Although style self-declaration can, therefore, be quite misleading, our results indicate that hedge funds do not misdeclare their style strategically to improve their relative performance. Copyright © 2006 John Wiley & Sons, Ltd.