Why Analyze Hedge Funds with PMVD?
PMVD as a Measure of Statistical Relative Importance
The PMVD picture of relative importance is more relevant to you than the factor model.
A smaller factor model with only large, mid, and small cap growth explains 51.9% of the all-history R2, compared to 57.8% for the style factors or 59.9% when the CBOE factors are added. The hypothesis that all other factors are zero cannot be rejected at any reasonable level of significance, so this smaller model can be argued to be the right model.
In the small model significance levels correspond in magnitude to PMVD components. Note, factor betas and covariance components also show the same relative importance among these factors, and, particularly, between large and mid cap growth.
The joint contributions of these three factors outweigh all other factors, and so their relative importance structure is preserved in the PMVD analysis with all factors.
Copyright © 2006 Prism Analytics