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

Massimo Guidolin and Alexei G. Orlov

No 1887, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

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 as well as return predictability. 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. Only strategies whose payoffs are highly nonlinear (e.g., fixed income relative value and convertible arbitrage), and therefore not easily replicable, constitute viable options. Most of the realized economic value fails to result from a mean-variance type of improvement but comes instead from an improvement in realized higher-moment properties of optimal portfolios. Medium to highly risk-averse investors benefit the most from this alternative asset class.

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)
Pages: 62 pages
Date: 2018
New Economics Papers: this item is included in nep-rmg and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Can Investors Benefit from Hedge Fund Strategies? Utility-Based, Out-of-Sample Evidence (2022)
Working Paper: Can Investors Benefit from Hedge Fund Strategies? Utility-Based, Out-of-Sample Evidence (2018)
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