K-Means Clustering of Self-Organizing Maps: An Empirical Study on the Information Content of Self-Classification of Hedge Fund Managers

Marcus Deetz
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Marcus Deetz: FOM University of Applied Science, Germany

International Journal of Management Science and Business Administration, 2019, vol. 5, issue 3, 43-57

Abstract: With the implementation of the 2-step approach according to Vesanto & Alhoniemi (2000), this article extends the procedure of visual evaluation of the Kohonen Maps usually chosen in the hedge fund literature for classification with Self-Organizing Maps. It introduces an automated procedure which guarantees a consistent combination of adjacent output units and thus an objective classification. The practical application of this method results in a reduction of the strategy groups specified by the database. This is also accompanied by a significant reduction in the Davies Bouldin Index (DBI) of the SOM partitions. Since a small dispersion within the clusters and large distances between the clusters lead to small DBIs, a minimization of this measure is desired. This significantly better partitioning of SOMs in comparison to the classification of hedge funds into the categorization scheme specified by the database provider can be observed in all examined data samples (robustness analyses). Ultimately, none of the original 23 strategy groups can be empirically validated. Furthermore, no stable classification can be found. Both the number of empirically determined categories (SOM clusters) and the composition of these clusters differ significantly in the subsamples examined. Thus the results essentially confirm the results and conclusions in the literature, according to which the original, self-classified strategy labels of the database providers are misleading and therefore do not contain any information content.

Keywords: Self-Organizing maps; Clustering; Classification; Hedge funds; Style creep (search for similar items in EconPapers)
JEL-codes: M00 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:mgs:ijmsba:v:5:y:2019:i:3:p:43-57

DOI: 10.18775/ijmsba.1849-5664-5419.2014.53.1006

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