TY - JOUR
T1 - Hedge fund portfolio selection with fund characteristics
AU - Joenväärä, Juha
AU - Kauppila, Mikko
AU - Kahra, Hannu
N1 - 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
PY - 2021/11
Y1 - 2021/11
N2 - 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.
AB - 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.
KW - Fund characteristics
KW - Hedge fund performance
KW - Performance persistence
KW - Performance predictability
KW - Portfolio optimization
UR - http://www.scopus.com/inward/record.url?scp=85109441179&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2021.106232
DO - 10.1016/j.jbankfin.2021.106232
M3 - Article
AN - SCOPUS:85109441179
SN - 0378-4266
VL - 132
JO - JOURNAL OF BANKING AND FINANCE
JF - JOURNAL OF BANKING AND FINANCE
M1 - 106232
ER -