Fixed Income Portfolio Allocation Including Hedge Fund Strategies: A Copula Opinion Pooling Approach

Journal of Fixed Income, Vol. 18, No. 4, 78-91.

Posted: 21 Aug 2008 Last revised: 29 May 2013

See all articles by Michael Stein

Michael Stein

University of Duisburg-Essen

Roland Füss

University of St. Gallen - School of Finance

Wolfgang Drobetz

University of Hamburg

Date Written: August 19, 2008

Abstract

This paper adapts Meucci's [2006a, 2006b] copula opinion pooling (COP) framework to examine whether fixed income hedge fund strategies enhance the risk-return spectrum of traditional bond portfolios. In contrast to the Black-Litterman setup, the COP approach does not rely on linear dependencies, and avoids the problems associated with the assumption of normally distributed asset returns. We analyze three scenarios that represent investor expectations about the performance of fixed income portfolios, and we add fixed income hedge fund strategies such as fixed income arbitrage, convertible bond arbitrage, and distressed securities, given expected shortfall constraints. Our results suggest that investor market expectations and attitudes toward potential losses are both important in determining the relative weight of hedge funds in the optimal portfolio. Depending on the model parameters, the allocation to hedge funds can vary greatly, from 0% to 85%.

Keywords: Fixed income portfolios, copula opinion pooling (COP) methodology, portfolio optimization, Monte Carlo simulations, hedge funds, robust Bayesian methods, non-normal return distributions, co-dependent markets, prior and posterior allocation

JEL Classification: C11, C61, G11

Suggested Citation

Stein, Michael and Füss, Roland and Drobetz, Wolfgang, Fixed Income Portfolio Allocation Including Hedge Fund Strategies: A Copula Opinion Pooling Approach (August 19, 2008). Journal of Fixed Income, Vol. 18, No. 4, 78-91.. Available at SSRN: https://ssrn.com/abstract=1237702

Michael Stein

University of Duisburg-Essen ( email )

Universitätsst. 12
Duisburg, 45117
Germany

HOME PAGE: http://www.fmoek.wiwi.uni-due.de/

Roland Füss (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland
+41 (0)71 224 70 42 (Phone)
+41 (0)71 224 70 88 (Fax)

HOME PAGE: http://www.sbf.unisg.ch/en/Lehrstuehle/Lehrstuhl_Fuess.aspx

Wolfgang Drobetz

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
3,235
PlumX Metrics