Can Investing in Hedge Funds Improve Efficiency for Economically Important Investors?

Yu-Chin Hsu, Rachel Huang (), Larry Y. Tzeng () and Christine W. Wang ()
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Larry Y. Tzeng: Department of Finance, National Taiwan University, Taiwan, http://www.management.ntu.edu.tw/en/Fin
Christine W. Wang: Risk Management Institute at the National University of Singapore, http://rmi.nus.edu.sg/contactus/rmilocation.php

No 16-A006, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: The purpose of this paper is to examine the performance of hedge funds from the efficient diversification point of view for economically important investors, which is defined as in Tsetlin et al. (2015). We adopt the generalized almost second-degree stochastic dominance (GASSD) rule proposed by Tsetlin et al. (2015). The rule includes second-degree stochastic dominance as a special case and is a consensus rule for all economically important investors. We establish statistical estimations and tests for the GASSD efficiency of a given portfolio relative to all possible portfolios formed from a given set of assets. We find that for all economically important investors, adding hedge funds to a diversified portfolio can improve efficiency. The results explain the popularity of hedge funds in practice. JEL Classification: D80, D81

Keywords: almost stochastic dominance; portfolio efficiency; hedge funds (search for similar items in EconPapers)
Pages: 21 pages
Date: 2016-06
New Economics Papers: this item is included in nep-eff and nep-sea
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