Classifying Hedge Funds with Kohonen Maps: A First Attempt¤

The purpose of this paper is to present an empirical study of a set of hedge funds on recent periods. Alternative investments are now widely used by institutional investors and numerous studies highlight the main features of such investments. As they are in general poorly correlated with the main world indexes, traditional asset pricing models yield poor adjustments, partially because of potential non-linearities in pay-o ¤ func-tions. Some funds, however, exhibit high reward to variability ratios and can be advantageously incorporated in a portfolio in a diversi…cation per-spective. After describing the dataset, we classify the funds employing the Kohonen algorithm. We then cross the classi…cation with the one based on the style of strategies involved, wondering if such categories are enough homogenous to be relevant. The map of funds allows to characterize fam-ilies of funds- whose conditional densities are di¤erent one to another-and to de…ne a representative fund for each class. The structure of th