References (2)



Portfolio Selection with Hedge Funds

Craig W. French

WBI Investments

April 12, 2005

We use the Markowitz framework to consider hedge funds as an asset class, and make two observations: First, even if hedge funds offered zero diversification benefit (perfectly positively correlated with traditional asset classes), the efficient frontier of exclusively stocks and bonds would still be completely dominated by the frontier which includes hedge funds. Second, it is critical to consider conditional correlations in addition to unconditional correlations. I extend an argument made by Roll (1980) about orthogonal portfolios to those which include hedge funds, in order to suggest that institutions, when evaluating potential new alternative asset classes for potential portfolio inclusion, should attach more importance to the vector of returns and the diagonal of the covariance matrix than to the off-diagonal terms. However, the off-diagonals should nonetheless be considered carefully, and I present a multi-regime conditional correlation methodology which utilizes a statistic we call the conditional correlation ratio, and show a simple example of its usefulness.

Number of Pages in PDF File: 7

Keywords: Portfolio, hedge fund

JEL Classification: G11

Open PDF in Browser Download This Paper

Date posted: July 23, 2005  

Suggested Citation

French, Craig W., Portfolio Selection with Hedge Funds (April 12, 2005). Available at SSRN: http://ssrn.com/abstract=757892 or http://dx.doi.org/10.2139/ssrn.757892

Contact Information

Craig W. French (Contact Author)
WBI Investments ( email )
331 Newman Springs Road, Suite 122
Red Bank, PA NJ 07701
United States
7328424920 (Phone)
Feedback to SSRN

Paper statistics
Abstract Views: 2,471
Downloads: 604
Download Rank: 28,135
References:  2

© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo8 in 0.297 seconds