Hong Kong-based hedge funds of funds shop Infiniti Capital has introduced a new way to quantitatively rank the risk adjusted returns of hedge funds.
The new ranking method, called the Infiniti Single Fund Analysis score, is included as a risk adjusted performance measure in Infiniti’s recently launched Infiniti Analytics Suite.
Peter Urbani, Infiniti chief investment officer and Infiniti Analytics Suite project originator, says: “We believe this method to be superior to most others in use. There is always general skepticism about new methods and a reluctance to adopt them due to corporate inertia. However, the proof of the pudding is always in the eating. Infiniti Capital has been using this method for the past two years.”
Infiniti says one major advantage of any quantitative method is that users can test its performance against all other known methods. In a recent study, the Infiniti Analytics Suite development team compared the performance of a portfolio built using the Single Fund Analysis total score as the objective to maximize versus three other widely used adjusted performance measures.
The study showed that by using the Single Fund Analysis total score as an objective function, annual returns of up to 500 basis points (five per cent) per year higher than those using other traditional methods were achievable.
The database used was a common set of 36 hedge funds. The returns achieved in 2008 were much higher than those for both the equally weighted portfolio and actual hedge fund of funds which generated average returns of -19 per cent last year.
The ratio of the absolute realised risk adjusted returns, denoted as the compound annual growth rate over the absolute value of the peak to trough drawdown (downside risk), was also the best for the Single Fund Analysis portfolio.
“The predictive power of the Single Fund Analysis score comes from its innovative construction, proprietary weighting and ability to identify some of the non-linear effects common to hedge funds,” Urbani says.
Unlike traditional performance measures, the Single Fund Analysis score is both conditional on the time period being used and relative to a large reference data set of other hedge funds. Where other methods typically standardise everything back to a normal or Gaussian distribution, the Infiniti Analytics Suite uses the best fitting distributions throughout. This has the effect of calibrating the range of scores more closely to real-world data.
