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

TY - JOUR

T1 - Hedge fund strategies, performance & diversification

T2 - 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

PY - 2021/9/24

Y1 - 2021/9/24

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

ER -