Hedge Fund Portfolio Diversification Strategies across the GFC
This paper features an analysis of the eectiveness of a range of portfolio diversication strategies as applied to a set of 17 years of monthly hedge fund index returns on a set of ten market indices representing 13 major hedge fund categories, as compiled by the EDHEC Risk Institute. The 17-year period runs from the beginning of 1997 to the end of August 2014. The sample period, which incorporates both the Global Financial Crisis (GFC) and subsequent European Debt Crisis (EDC), is a challenging one for the application of diversication and portfolio investment strategies. The analysis features an examination of the di- versication benets of hedge fund investments through successive crisis periods. The connectedness of the Hedge Fund Indices is explored via application of the Diebold and Yilmaz (2009, 2014) spillover index. We conduct a series of portfolio optimisation analyses: comparing Markowitz with naive diversication, and evaluate the relative eectiveness of Markowitz portfolio optimisation with various draw-down strategies, using a series of backtests. Our results suggest that Markowitz optimisation matches the characteristics of these hedge fund indices quite well.
|Keywords||Hedge Fund Diversication, Spillover Index, Markowitz Analaysis|
|JEL||Portfolio Choice; Investment Decisions (jel G11), Optimization Techniques; Programming Models; Dynamic Analysis (jel C61)|
|Series||Tinbergen Institute Discussion Paper Series|
Allen, D.E, McAleer, M.J, Peiris, S, & Singh, A.K. (2014). Hedge Fund Portfolio Diversification Strategies across the GFC (No. TI 14-151/III). Tinbergen Institute Discussion Paper Series. Tinbergen Institute. Retrieved from http://hdl.handle.net/1765/77397