Hedge Fund Strategies, Performance Diversification: A Portfolio Theory & Stochastic Discount Factor Approach



Newton, David, Platanakis, Emmanouil, Stafylas, Dimitrios, Sutcliffe, Charles and Ye, Xiaoxia ORCID: 0000-0002-5024-6186
(2021) Hedge Fund Strategies, Performance Diversification: A Portfolio Theory & Stochastic Discount Factor Approach. The British Accounting Review, 53 (5). p. 101000.

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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.

Item Type: Article
Additional Information: Source info: The British Accounting Review, Forthcoming
Uncontrolled Keywords: Hedge funds, Portfolio diversification, Black-Litterman, Bayes-Stein, Stochastic discount factors
Divisions: Faculty of Humanities and Social Sciences > School of Management
Depositing User: Symplectic Admin
Date Deposited: 29 Mar 2021 13:40
Last Modified: 27 Mar 2023 01:30
DOI: 10.1016/j.bar.2021.101000
Related URLs:
URI: https://livrepository.liverpool.ac.uk/id/eprint/3118191