Hedge Funds Clustered by Risk, Return and Correlation

New hedge funds emerge to satisfy high investor demand, but some hedge fund strategies fail to deliver unique return and risk characteristics. Using K means++ clustering and principal component analysis, we find that we can capture the risk profiles of the existing funds with nine clusters. Moreover, we find that some funds deliver risk/return profiles that are not distinct from that of the index. Our results suggest that investors must consider carefully whether a hedge fund can deliver return and diversification benefits befitting its expenses