Hedge fund portfolio selection with fund characteristics

Juha Joenväärä, Mikko Kauppila and Hannu Kahra

Journal of Banking & Finance, 2021, vol. 132, issue C

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.

Keywords: Hedge fund performance; Portfolio optimization; Fund characteristics; Performance predictability; Performance persistence (search for similar items in EconPapers)
JEL-codes: C31 G11 G12 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:132:y:2021:i:c:s0378426621001916

DOI: 10.1016/j.jbankfin.2021.106232

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