{"title":"Can Investors Benefit from Hedge Fund Strategies? Utility-Based, Out-of-Sample Evidence","authors":"Massimo Guidolin, Alexei G. Orlov","doi":"10.1142/s2010139222500070","DOIUrl":null,"url":null,"abstract":"<p>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.</p>","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":null,"pages":null},"PeriodicalIF":0.9000,"publicationDate":"2022-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Quarterly Journal of Finance","FirstCategoryId":"91","ListUrlMain":"https://doi.org/10.1142/s2010139222500070","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q3","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
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.
期刊介绍:
The Quarterly Journal of Finance publishes high-quality papers in all areas of finance, including corporate finance, asset pricing, financial econometrics, international finance, macro-finance, behavioral finance, banking and financial intermediation, capital markets, risk management and insurance, derivatives, quantitative finance, corporate governance and compensation, investments and entrepreneurial finance.