Edhec-Risk
Features
Performance - December 19, 2005

EDHEC teams up with French financial newspaper La Tribune to produce the first Funds of Hedge Funds rankings in France

Following the launch of the EuroPerformance-EDHEC Style Ratings, the innovative system for rating the performance of European mutual funds, which measures the performance with regard to the risks that were really taken by the managers while at the same time taking the extreme risks being run and the managers’ capacity to generate outperformance into account, the French financial daily La Tribune asked EDHEC to apply the same approach to rating funds of hedge funds.

The results of the inaugural rankings were published in France on December 13th. The joint winners of the first edition were AGF Alternative Asset Management (the Phenix Alternative Holdings fund) and Edmond de Rothschild Multi Management (Virtuose Equilibre). The runners-up were HDF Finance and La Française des Placements. The final asset management firm on the podium was Alteram.

The rankings were determined through three elements:

  • The quality of management in terms of performance (based on the excess return compared to the strategic benchmark specific to each fund and an evaluation of the quality of the strategic allocation);

  • The quality of management in terms of the risks being run (based on the average and extreme risk differentials between the fund of funds and its strategic benchmark);

  • Performance persistence (based on the funds’ capacity to deliver positive performance over the analysis period and their capacity to produce regular outperformance without excessive volatility).

The quality of management in terms of performance

As with mutual funds, the performance of a fund of funds can be broken down into two distinct elements: on the one hand, a normal return corresponding to its strategic allocation between the risks (or betas); and on the other, an additional return generated through tactical bets and/or better fund picking (alpha).

In order to be able to evaluate the additional return, which is the fruit of active management, one initially defines the strategic benchmark that is specific to each fund of funds. This is determined using an RBSA-type analysis (Return Based Style Analysis). To do this, we used the EDHEC composite indices corresponding to the main alternative strategies, together with traditional indices for equities, bonds and the money market. An initial ranking of eligible funds of funds was thereby produced on the basis of excess return in comparison with the strategic benchmark that was specific to each fund.

A second ranking was then carried out to rate the quality of the strategic allocation.

The arithmetic average of the two scores obtained constitutes the overall score for performance.

The quality of management in terms of the risk being run

Two indicators were selected to evaluate the quality of management in terms of risk control:

  • The volatility differential (average risk) between the fund of funds and its strategic benchmark on the one hand; and

  • the differential between the Value-at-Risk (extreme risk) of the fund of funds and its strategic benchmark on the other.
The volatility gap and the extreme risk differential are scored separately, with the arithmetic average of the two scores obtained providing the overall score for risk control.

Performance Persistence

Ratings are often used by investors to make investment decisions rather than just being used to reward past performance. From this point of view, a fund’s capacity to reproduce its performance is a key question for the users of the rankings.

That is why we decided to fine-tune the persistence measure by distinguishing between the fund of funds’ capacity to deliver positive performance over the analysis period on the one hand (frequency of positive gains), and their capacity to produce regular outperformance without excessive volatility on the other (Hurst exponent).

The arithmetic average of the two scores obtained then determined the overall score for performance persistence.

Results Table: Ranking of French Funds of Hedge Funds

The overall score awarded to each fund of funds corresponds to the arithmetic average of the three scores attributed for performance, risk control and performance persistence. It therefore varied from 1 (worst quartile and thus lowest score possible) to 4 (best quartile and thus best score possible).

Ranking

Management Company

Fund(s)

Score(s)

Joint 1st

AGF Alternative AM

Phenix Alternative Holdings

3.17

Joint 1st & 2nd

Edmond de Rothschild
Multi Management

Virtuose Equilibre

Sélection Privée

3.17

3

Joint 2nd

HDF Finance

Asclepios

HDF Capital Appréciation

3

3

Joint 2nd & 3rd

La Française des Placements

LFP Alternatif Arbitrage

LFP Alternatif Diversifié

Pro Alternatif Harmonie

3

2.83

2.83

Joint 3rd

Alteram

Alteram Stratégie Futures

2.83


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