Portfolio choices and hedge funds: a disappointment aversion analysis

René Ferland and Simon Lalancette

The European Journal of Finance, 2021, vol. 27, issue 7, 679-705

Abstract: The inclusion of hedge funds in large institutional portfolios is controversial. We use a disappointment aversion utility-based framework to investigate this issue. We empirically model the end-of-period wealth directly as opposed to the joint return distribution. This approach captures the interconnections between different asset categories without resorting to complex modeling. We observe that several hedge-fund strategies produce incremental economic benefits that generally weaken at higher levels of disappointment aversion. Portfolio weights are also constrained to match those of a generic pension fund. Results show that significant economic benefits are possible but only under restrictive conditions.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:27:y:2021:i:7:p:679-705

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DOI: 10.1080/1351847X.2020.1832552

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