TY - JOUR
T1 - Hedge fund strategies, performance & diversification: A portfolio theory & stochastic discount factor approach
AU - Newton, David
AU - Platanakis, Emmanouil
AU - Stafylas, Dimitrios
AU - Sutcliffe, Charles
AU - Ye, Xiaoxia
N1 - Funding Information:
We wish to thank the referee and participants at the British Accounting and Finance Association (BAFA) Corporate Finance and Asset Pricing Conference 2019, the 26th Annual Global Finance Conference (Zagreb), and the 9th International Conference of the Financial Engineering and Banking Society (Prague) for their valuable comments on earlier versions of this paper.
Publisher Copyright:
© 2021 British Accounting Association
Copyright:
Copyright 2021 Elsevier B.V., All rights reserved.
PY - 2021/9/30
Y1 - 2021/9/30
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 - 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
AN - SCOPUS:85104084615
SN - 0890-8389
VL - 53
JO - British Accounting Review
JF - British Accounting Review
IS - 5
M1 - 101000
T2 - Financial Management Association (FMA) European Conference
Y2 - 15 June 2021 through 18 June 2021
ER -