Practical Applications of The (Mis)Behavior of Hedge Fund Strategies: A Network-Based Analysis

Practical Applications Summary

In The (Mis)Behavior of Hedge Fund Strategies: A Network-Based Analysis, from the Summer 2019 issue of The Journal of Alternative Investments, authors Eduard Baitinger and Thomas Maier (both of FERI Trust GmbH) demonstrate that some hedge fund (HF) strategies deviate sharply from their strategy classifications, sometimes in very pronounced ways. By analyzing such strategies with a network-based methodology that clusters underlying assets into a financial matrix, the authors reveal hidden overlaps among strategies, as well as unforeseen risks due to interconnected assets. They also discover that some strategies are less predictable than others, behaving quite erratically over time.

This innovative study unveils the shortcomings of some traditional hedge fund strategy classifications. Investment professionals should be aware of the risks that HF strategy misbehavior creates, and the authors provide a number of network diagrams to help guide investors to proper diversification of assets.