6
Introduction
Psychology tends to produce too many subjective answers and no objective theory.
Although the term “hedge funds” is often used generically, it is essential to understand that, in reality, hedge funds no longer form a homogeneous group. As hedge funds have gained size and popularity, they have deviated from the original Alfred W. Jones’ model and are now following a plethora of investment strategies with very different risk and return characteristics. Of course, one could argue that their situation is not fundamentally different from the one that prevails with traditional asset classes – equities can be split by industrial sectors, growth and value styles, and cyclical and non-cyclical categories, and bonds can be analysed by durations, credit categories, or industry and geographic categories. Nevertheless, despite the existence of many subcategories, equities and bonds still have some common factors throughout their respective asset class. By contrast, it is usually difficult to identify a common factor for hedge funds beyond the “unregulated” and “privately-offered” attributes. Nevertheless, understanding the common nature as well as the differences between funds that follow the same investment strategy is crucial in order to develop a coherent investment plan.
To analyse hedge funds, consultants, investors and managers alike need to segregate their universe into a range of standardized investment styles. Unfortunately, there is no accepted norm to classify the ...

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