University of Oulu

Joenväärä, J., Kauppila, M., & Kahra, H. (2021). Hedge fund portfolio selection with fund characteristics. Journal of Banking & Finance, 132, 106232.

Hedge fund portfolio selection with fund characteristics

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Author: Joenväärä, Juha1; Kauppila, Mikko2; Kahra, Hannu2
Organizations: 1Aalto University, P.O. Box 11000, FI-00076 Aalto, Espoo, Finland
2Oulu Business School, University of Oulu, P.O. Box 4600, FI-90014, Oulu, Finland
Format: article
Version: published version
Access: open
Online Access: PDF Full Text (PDF, 1.2 MB)
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Language: English
Published: Elsevier, 2021
Publish Date: 2022-03-08


This paper examines hedge fund portfolio selection approaches in isolation and in the context of an investor’s overall portfolio. Characteristics-based portfolios that minimize risk delivers superior out-of-sample performance. For instance, a minimum variance portfolio tilting toward small funds with high alpha and strategy distinctiveness index and low systematic risk delivers an annualized Sharpe ratio of 2.03 with a maximum drawdown of 5.20%. Investors realize diversification benefits by shifting a portion of their wealth from 60 to 40 equity-bond portfolio to characteristics-based hedge fund portfolio. Investors recognize the attractiveness of characteristics-based portfolios, but do not target flows enough to erode their superior performance.

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Series: Journal of banking & finance
ISSN: 0378-4266
ISSN-E: 1872-6372
ISSN-L: 0378-4266
Volume: 132
Article number: 106232
DOI: 10.1016/j.jbankfin.2021.106232
Type of Publication: A1 Journal article – refereed
Field of Science: 512 Business and management
Copyright information: © 2021 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license ( )