Hedge fund portfolio selection with fund characteristics
Joenväärä, Juha; Kauppila, Mikko; Kahra, Hannu (2021-07-08)
Joenväärä, J., Kauppila, M., & Kahra, H. (2021). Hedge fund portfolio selection with fund characteristics. Journal of Banking & Finance, 132, 106232. https://doi.org/10.1016/j.jbankfin.2021.106232
© 2021 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license ( http://creativecommons.org/licenses/by/4.0/ )
https://creativecommons.org/licenses/by/4.0/
https://urn.fi/URN:NBN:fi-fe2022030822361
Tiivistelmä
Abstract
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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