Hedge fund portfolio selection with fund characteristics
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A1 Alkuperäisartikkeli tieteellisessä aikakauslehdessä
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Date
2021-11
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Language
en
Pages
17
Series
Journal of Banking and Finance, Volume 132
Abstract
This paper examines hedge fund portfolio selection approaches in isolation and in the context of an investor's overall portfolio. Characteristics-based portfolios that minimize risk delivers superior out-of-sample performance. For instance, a minimum variance portfolio tilting toward small funds with high alpha and strategy distinctiveness index and low systematic risk delivers an annualized Sharpe ratio of 2.03 with a maximum drawdown of 5.20%. Investors realize diversification benefits by shifting a portion of their wealth from 60 to 40 equity-bond portfolio to characteristics-based hedge fund portfolio. Investors recognize the attractiveness of characteristics-based portfolios, but do not target flows enough to erode their superior performance.Description
Funding Information: For helpful comments we would like to thank Robert Kosowski, Vance Martin and Antti Petäjistö. We also thank Pekka Tolonen for helping us with the data processing. We are grateful for the support of OP-Pohjola Group Research Foundation. The usual disclaimer applies. Publisher Copyright: © 2021
Keywords
Fund characteristics, Hedge fund performance, Performance persistence, Performance predictability, Portfolio optimization
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Citation
Joenväärä, J, Kauppila, M & Kahra, H 2021, ' Hedge fund portfolio selection with fund characteristics ', Journal of Banking and Finance, vol. 132, 106232 . https://doi.org/10.1016/j.jbankfin.2021.106232