During the first week of each month, I analyze key fundamental measures of each stock in the Hedgefolios Universe and assign definitions of the general criteria that most investors use to construct their portfolios - Size, Style and Income. While Russell reconstitutes its growth and value indices once a year and S&P/Barra does it twice, Hedgefolios does it monthly to recognize the changes that occur with a stock’s relative size, style and yield during 6 or 12-month periods.

For Size, all stocks are assigned a definition of Large Cap, Mid Cap or Small Cap based upon individual market caps relative to the total market cap for the Hedgefolios Universe. For Income, dividend-paying stocks are divided into thirds and assigned Low Yield, Mid Yield or High Yield definitions. About half the stocks covered by Hedgefolios do not pay dividends and are assigned a definition of No Yield.

Creating Style definitions is a more complex process than the Size and Income methodologies. Rather than relying on 1 or 2 variables to determine whether a stock should be considered Value or Growth, I use 6 fundamental ratios (Price-to-Earnings (Trailing), Price-to-Earnings (Forward), Price-to-Book, Price-to-Sales, Price-to-Cash Flow, and 5-Year Expected Earnings Growth). Employing a multivariate approach is particularly important for the stocks that may not have a ratio that can be calculated given that it is common to have no PE. In those cases, the composite style score is determined by adding each of the 6 variables that does exist and calculating a simple average. To make sure that each variable can be fairly compared to all the other stocks and all the other variables, they are standardized into a numeric value from .0001 to 1.0000.