Bank Report Explores Hedge Fund Myths

Date: Friday, October 24, 2008
Author: Paula Schaap, Hedgefund.net

Many hedge fund firms don’t deserve their public images as volatile, alpha-driven investment vehicles, according to a report from the Bank of New York Mellon.

The bank’s report, which was prepared with research firm Oxford Metrica, claimed that cluster analysis revealed high volatility and absolute return were not characteristics of many hedge fund companies.

Cluster analysis is a statistical tool that studies how entities sharing the same characteristics perform in relation to one another. In this case, the report analyzed more than 5,000 hedge fund firms in terms of their returns instead of their management style.

Bank of New York Managing Director David Aldrich said this way of analyzing hedge fund firm returns would give investors better tools to use alternatives investments for diversification strategies.

The report cautioned that there were notable exceptions to its findings. One example was Amaranth Advisors, a hedge fund firm that lost $6 billion in September 2006 when it made the wrong bet on natural gas futures.