Optimal Allocation to Hedge Funds: An Empirical Analysis

Jaksa Cvitanic, Ali Lazrak, Lionel Martellini, Fernando Zapatero: What percentage of their portfolio should investors allocate to hedge funds?

Author(s):

Jaksa Cvitanic

University of Southern California

Ali Lazrak

University of British Columbia

Lionel Martellini

Marshall School of Business, University of Southern CaliforniaEDHEC Business School

Fernando Zapatero

Marshall School of Business, University of Southern California

The only available answers to the above question are set in a static mean-variance framework, with no explicit accounting for uncertainty on the active manager’s ability to generate abnormal return, and usually generate unreasonably high allocations to hedge funds. In this paper, we apply the model introduced in Cvitanic, Lazrak, Martellini and Zapatero (2002b) for optimal investment strategies in the presence of uncertain abnormal returns to a database of hedge funds. We find that the presence of model risk significantly decreases an investor’s optimal allocation to hedge funds. Another finding of this paper is that low beta hedge funds may serve as natural substitutes for a significant portion of an investor's risk-free asset holdings.

Type: Working paper
Date: le 01/01/2003
Research Cluster : Finance

See Also

EDHEC career support at distance: continuous follow-up and a highly active network
News
- 05-06-2020
After fully digitalising its services, the EDHEC Student Career Centre has been...
How I got my dream internships
News
- 02-06-2020
I originally wanted to be a footballer. I daydreamed about training with the top...
« EDHEC, the best experience of my life so far »
News
- 29-05-2020
WHAT IS YOUR EDUCATIONAL BACKGROUND PRIOR TO EDHEC? Prior to EDHEC, I pursued a...
Meet Valentin Grinner, Pre-Master student
News
- 28-05-2020
Valentin Grinner “I’ve started a MOOC to learn web development” Valentin, 20, is...