Hedge fund strategies, performance & diversification: A portfolio theory & stochastic discount factor approach

David Newton, Emmanouil Platanakis, Dimitrios Stafylas, Charles Sutcliffe, Xiaoxia Ye

Research output: Contribution to journalArticlepeer-review

Abstract

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.
Original languageEnglish
Article number101000
JournalBritish Accounting Review
Early online date27 Mar 2021
DOIs
Publication statusE-pub ahead of print - 27 Mar 2021
EventFinancial Management Association (FMA) European Conference -
Duration: 15 Jun 202118 Jun 2021

Keywords

  • Bayes-Stein
  • Black-Litterman
  • Hedge funds
  • Portfolio diversification
  • Stochastic discount factors

ASJC Scopus subject areas

  • Finance
  • Economics, Econometrics and Finance (miscellaneous)
  • Business, Management and Accounting(all)

Cite this