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http://ssrn.com/abstract=297859
 
 

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Hedge Fund Allocation with Survival Uncertainty and Investment Constraints


Pierre-Antoine Bares


affiliation not provided to SSRN

Rajna Gibson


University of Geneva - Graduate School of Business (HEC-Geneva); Swiss Finance Institute

Sebastien Gyger


Lombard Odier Darier Hentsch & Cie

January 2002

EFMA 2002 London Meetings

Abstract:     
In this paper, we propose to study a hedge funds allocation problem. A typical feature of those alternative investments vehicles is their propensity to cease their activity after experiencing a distressing situation. We use an expected utility framework to integrate the hedge funds survival uncertainty and rely on the class of isoelastic functions to model the investor's preferences. The addition of investment constraints complicates the resolution of the optimal allocation problem. It is solved using a genetic algorithm that mimics the mechanism of natural evolution and is specifically designed to handle a set of non-linear investment constraints. We finally apply the genetic algorithm to analyze the impact of the survival uncertainty and of the investments constraints on the optimal allocation and on the certainty equivalent of hedge funds' portfolios. One observes in particular that the optimal portfolio weights are significantly affected when the survival uncertainty is taken into account. An out-of-sample analysis shows that when the survival uncertainty is introduced into an expected utility model, the use of tight investment constraints provides an interesting complement to the due diligence process in the absence of any a priori skills for detecting persistence in the hedge funds' performance.

Number of Pages in PDF File: 50

Keywords: Hedge Fund, Portfolio Optimization

JEL Classification: G1, G2, G11, C61

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Date posted: January 28, 2002  

Suggested Citation

Bares, Pierre-Antoine and Gibson , Rajna and Gyger, Sebastien, Hedge Fund Allocation with Survival Uncertainty and Investment Constraints (January 2002). EFMA 2002 London Meetings. Available at SSRN: http://ssrn.com/abstract=297859 or http://dx.doi.org/10.2139/ssrn.297859

Contact Information

Pierre-Antoine Bares
affiliation not provided to SSRN
Rajna Gibson (Contact Author)
University of Geneva - Graduate School of Business (HEC-Geneva) ( email )
40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+41.22.379.89.83 (Phone)
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Sebastien Gyger
Lombard Odier Darier Hentsch & Cie ( email )
Rue de la Corraterie 11
Geneva, 1204
Switzerland
+41 22 709 31 77 (Phone)
HOME PAGE: http://www.lodh.com
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