TY - JOUR
T1 - Hedge Fund Strategies, Performance Diversification: A Portfolio Theory & Stochastic Discount Factor Approach
AU - Newton, David F.
AU - Platanakis, Emmanouil
AU - Stafylas, Dimitrios
AU - Sutcliffe, Charles
AU - Ye, Xiaoxia
PY - 2021/9
Y1 - 2021/9
N2 - For 5500 North American hedge funds following 11 different strategies, we analyse the stand-alone performance of these strategies using a stochastic discount factor approach. Employing the same data, we then consider the diversification benefits of each hedge fund strategy when combined with a portfolio of US equities and bonds. We compute the out-of-sample Black-Litterman portfolios, with Bayes-Stein, higher moments, simulations, desmoothed data and allowance for regimes as robustness checks. All but two hedge fund strategies out-perform the market as stand-alone investments; and all but one provide significant diversification benefits. The higher is an investor’s risk aversion, the more beneficial is diversification into hedge funds.
AB - For 5500 North American hedge funds following 11 different strategies, we analyse the stand-alone performance of these strategies using a stochastic discount factor approach. Employing the same data, we then consider the diversification benefits of each hedge fund strategy when combined with a portfolio of US equities and bonds. We compute the out-of-sample Black-Litterman portfolios, with Bayes-Stein, higher moments, simulations, desmoothed data and allowance for regimes as robustness checks. All but two hedge fund strategies out-perform the market as stand-alone investments; and all but one provide significant diversification benefits. The higher is an investor’s risk aversion, the more beneficial is diversification into hedge funds.
KW - Bayes-Stein
KW - Black-Litterman
KW - Hedge funds
KW - Portfolio diversification
KW - Stochastic discount factors
UR - https://www.sciencedirect.com/science/article/pii/S0890838921000263?via%3Dihub
UR - http://www.scopus.com/inward/record.url?scp=85104084615&partnerID=8YFLogxK
U2 - 10.1016/j.bar.2021.101000
DO - 10.1016/j.bar.2021.101000
M3 - Article
VL - 53
JO - British Accounting Review
JF - British Accounting Review
SN - 0890-8389
IS - 5
M1 - 101000
ER -