Hedge Fund Portfolio Diversification Strategies Across the GFC

David Allen, Michael McAleer, Shelton Peiris and Abhay K. Singh
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Shelton Peiris: School of Mathematics and Statistics, University of Sydney
Abhay K. Singh: School of Accounting, Finance and Economics, Edith Cowan University, Australia

No 2014-32, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: This paper features an analysis of the e_ectiveness of a range of portfolio diversification strategies as applied to a set of 17 years of monthly hedge fund index returns on a set of ten market indices representing 13 major hedge fund categories, as compiled by the EDHEC Risk Institute. The 17-year period runs from the beginning of 1997 to the end of August 2014. The sample period, which incorporates both the Global Financial Crisis (GFC) and subsequent European Debt Crisis (EDC), is a challenging one for the application of diversi_cation and portfolio investment strategies. The analysis features an examination of the diversification bene_ts of hedge fund investments through successive crisis periods. The connectedness of the Hedge Fund Indices is explored via application of the Diebold and Yilmaz (2009, 2014) spillover index. We conduct a series of portfolio optimisation analyses: comparing Markowitz with naive diversi_cation, and evaluate the relative e_ectiveness of Markowitz portfolio optimisation with various draw-down strategies, using a series of backtests. Our results suggest that Markowitz optimisation matches the characteristics of these hedge fund indices quite well.

Keywords: Hedge Fund Diversi_cation; Spillover Index; Markowitz Analaysis; Downside Risk; CVaR; Draw-Down. (search for similar items in EconPapers)
JEL-codes: C61 G11 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2014
New Economics Papers: this item is included in nep-fmk and nep-rmg
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Working Paper: Hedge Fund Portfolio Diversification Strategies Across the GFC (2014)
Working Paper: Hedge Fund Portfolio Diversification Strategies across the GFC (2014)
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