Hedge fund strategies, performance &diversification: A portfolio theory & stochastic discount factor approach

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

The British Accounting Review, 2021, vol. 53, issue 5

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.

Keywords: Hedge funds; Portfolio diversification; Black-Litterman; Bayes-Stein; Stochastic discount factors (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:bracre:v:53:y:2021:i:5:s0890838921000263

DOI: 10.1016/j.bar.2021.101000

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