Can Investors Benefit from Hedge Fund Strategies? Utility-Based, Out-of-Sample Evidence

Massimo Guidolin and Alexei G. Orlov
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Alexei G. Orlov: U.S. Commodities Futures Trading Commission, Washington, DC, USA

Quarterly Journal of Finance (QJF), 2022, vol. 12, issue 03, 1-61

Abstract: We report systematic, out-of-sample evidence on the benefits to an already well-diversified investor that may derive from further diversification into various hedge fund strategies. We investigate dynamic strategic asset allocation decisions that take into account investors’ preferences, realistic transaction costs, return predictability, and the parameter uncertainty that such predictability implies. Our results suggest that not all hedge fund strategies benefit a long-term investor who is already well-diversified across stocks, government and corporate bonds, and REITs. However, when parameter uncertainty is accounted for, the best performing models offer net positive economic gains to investors with low and moderate risk aversion. Most of the realized economic value fails to result from mean-variance-type enhancements in realized performance but comes instead from an improvement in realized higher-moment properties of optimal portfolios.

Keywords: Strategic asset allocation; hedge fund strategies; predictive regressions; out-of-sample performance; certainty equivalent return (search for similar items in EconPapers)
JEL-codes: C53 G11 G12 G17 (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: Can Investors Benefit from Hedge Fund Strategies? Utility-Based, Out-of-Sample Evidence (2018)
Working Paper: Can Investors Benefit from Hedge Fund Strategies? Utility-Based, Out-of-Sample Evidence (2018)
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DOI: 10.1142/S2010139222500070

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