Assessing the Performance of the Hedge Funds Market: An Application to the Italian Hedge Funds Industry

Abstract

Due to the complexity and heterogeneity of hedge fund strategies, assessing their performance is a challenging task. Reminiscent of the mutual fund industry, the literature has evolved in the direction of refining traditional measures (e.g. the Sharpe ratio) or introducing new ones.

This paper offers a new approach, based on the Principal Component Analysis (PCA), to uncover the relevant information for performance measurement, quantify, and combine it into a unique rank.

In addition, this paper assesses the ability of each individual hedge fund to raise the efficiency of a balanced portfolio by means of an extension of the Modigliani - Modigliani index. Finally, for illustration purposes, the methodology is applied for assessing the recent performance of the nascent Italian hedge fund industry.

Keywords: Hedge funds, Assessing performance, Portfolio's efficiency, Principal component analysis, Modigliani-Modigliani Index

JEL Classification: G11, G12, C35