Why Analyze Hedge Funds with PMVD?
Introduction
In the world of mutual funds, style analysis is widely used for essential tasks such as screening funds, constructing investor portfolios, monitoring managers, and reporting manager performance. This, in spite of the often-short data histories, challenges in defining benchmarks, and limitations of statistical methods.
Returns-based analysis is more important for hedge funds than mutual funds. Why? Hedge fund managers have greater complexity and diversity in strategy. Hedge funds are less transparent. Holdings are harder to analyze. Strategy drift may not be apparent from holdings. And understanding a hedge fund’s profile against conventional markets from its holdings may be difficult.
Returns-based analysis of hedge funds faces additional challenges. Histories are shorter. Manager strategies are more dynamic. Reported asset values are less reliable. And, most importantly for my presentation, the statistical assumptions behind style analysis, as developed by Bill Sharpe, are not appropriate.
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