(Harvest) To explore hedge fund energy clustering we analyze long energy sector portfolios of all hedge funds that are analyzable using regulatory filings. We then exclude funds with insignificant energy holdings. We use the AlphaBetaWorks Statistical Equity Risk Model, a proven tool for forecasting portfolio risk and performance. For each portfolio pair we estimate the futurerelative volatility (tracking error). The lower the expected relative tracking error between funds, the more similar they are to each other.
Once each hedge fund pair is analyzed we identify groups of funds with like exposures and build clusters (similar to phylogenic trees, or family trees) of the funds’ long portfolios. We useagglomerative hierarchical clustering with estimated future relative tracking error as the metric ofdifferentiation or dissimilarity:
