Portfolio Optimisation and Hedge Fund Style Allocation Decisions

Noël Amenc, Lionel Martellini: This paper attempts to evaluate the out-of-sample performance of an improved estimator of the covariance structure of hedge fund index returns, focusing on its use for optimal portfolio selection.

Auteur(s) :

Noel Amenc

Professor of Finance, EDHEC Graduate School of BusinessHead of Research, Misys Asset Management Systems

Lionel Martellini

Assistant Professor of Finance, Marshall School of Business

Using data from CSFB-Tremont hedge fund indices, we find that ex-post volatility of minimum variance portfolios generated using implicit factor based estimation techniques is between 1.5 and 6 times lower than that of a value-weighted benchmark, such differences being both economically and statistically significant. This strongly indicates that optimal inclusion of hedge funds in an investor portfolio can potentially generate a dramatic decrease in the portfolio volatility on an out-of-sample basis. Differences in mean returns, on the other hand, are not statistically significant, suggesting that the improvement in terms of risk control does not necessarily come at the cost of lower expected returns.

Type : Working paper
Date : le 01/01/2003
Pôle de recherche Finance

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