Hedge fund strategies, performance & diversification

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

OAI: oai:purehost.bath.ac.uk:publications/474cafac-7790-4ff8-9606-fba04182e930 • DOI: https://doi.org/10.1016/j.bar.2021.101000

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.

Bayes-Stein Black-Litterman Hedge funds portfolio diversification Stochastic discount factors /dk/atira/pure/subjectarea/asjc/2000/2003 name=Finance /dk/atira/pure/subjectarea/asjc/2000/2001 name=Economics, Econometrics and Finance (miscellaneous) /dk/atira/pure/subjectarea/asjc/1400/1400 name=General Business,Management and Accounting