Forecasting Hedge Fund Index Returns by Level and Classification: A Comparative Analysis of Neural Network Topologies

Over the recent past, stylized facts have not yielded a synthesis regarding the predictability of returns for alternative investment assets such as hedge funds. Recent studies on alternative asset return predictability have added to the ambiguity. These studies suggest that classification prediction methods may dominate more traditional return-level prediction methodology. This paper examines the predictive accuracy of three alternate radial basis function neural networks when applied to the returns of thirteen Credit Swiss First Boston/Tremont (CSFB) hedge fund indices. We provide evidence that the Kajiji-4 RBF neural network dominates within the RBF topology in the prediction of hedge fund returns by both level and classification. The results also show that the Kajiji-4 method is capable of near perfect directional prediction. Forecasting Hedge Funds Index Returns.... -2Dash & Kajiji Forecasting Hedge Fund Index Returns by Level and Classification: A Comparative Analysis of Neural Network Topologies