Hedge fund strategies, performance &diversification: A portfolio theory & stochastic discount factor approach. Issue 5 (September 2021)

• Record Type: Journal Article
• Authors: Newton, David; Platanakis, Emmanouil; Stafylas, Dimitrios; Sutcliffe, Charles; Ye, Xiaoxia
• Is Part Of: British accounting review. Volume 53:Issue 5(2021)
• Publication Date: 2021-09
• Subjects: Hedge funds -- Portfolio diversification -- Black-Litterman -- Bayes-Stein -- Stochastic discount factors; G11; Accounting -- Periodicals; Accounting -- Great Britain -- Periodicals; Comptabilité -- Périodiques; Comptabilité -- Grande-Bretagne -- Périodiques; 657.05
• DOI: 10.1016/j.bar.2021.101000
• Languages: English
• ISSNs: 0890-8389

Abstract

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.