Hedge fund strategies, performance & diversification: a portfolio theory & stochastic discount factor approach

Newton, D., Platanakis, E., Stafylas, D., Sutcliffe, C. ORCID: https://orcid.org/0000-0003-0187-487X and Ye, X. (2021) Hedge fund strategies, performance & diversification: a portfolio theory & stochastic discount factor approach. The British Accounting Review, 53 (5). 101000. ISSN 0890-8389 doi: 10.1016/j.bar.2021.101000

Abstract/Summary

For 5,500 North American hedge funds following 11 different strategies, we analyse the stand-alone performance of these strategies using a stochastic discount factor approach. Employing the same data, we then consider the diversification benefits of each hedge fund strategy when combined with a portfolio of US equities and bonds. We compute the out-of-sample Black-Litterman portfolios, with Bayes-Stein, higher moments, simulations, desmoothed data and allowance for regimes as robustness checks. All but two hedge fund strategies out-perform the market as stand-alone investments; and all but one provide significant diversification benefits. The higher is an investor’s risk aversion, the more beneficial is diversification into hedge funds.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/97029
Identification Number/DOI	10.1016/j.bar.2021.101000
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Elsevier
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