Fund-of-Funds Construction by Statistical Multiple Testing Methods

Institute for Empirical Research in Economics University of Zurich Working Paper No. 445

24 Pages Posted: 25 Sep 2009

See all articles by Michael Wolf

Michael Wolf

University of Zurich - Department of Economics

Dan Wunderli

University of Zurich - Department of Economics; Swiss National Bank

Date Written: September 24, 2009

Abstract

Fund-of-funds (FoF) managers face the task of selecting a (relatively) small number of hedge funds from a large universe of candidate funds. We analyse whether such a selection can be successfully achieved by looking at the track records of the available funds alone, using advanced statistical techniques. In particular, at a given point in time, we determine which funds significantly outperform a given benchmark while, crucially, accouting for the fact that a large number of funds are examined at the same time. This is achieved by employing so-called multiple testing methods. Then, the equal-weighted or the global minimum variance portfolio of the outperforming funds is held for one year, after which the selection process is repeated. When backtesting this strategy on two particular hedge fund universes, we find that the resulting FoF portfolios have attractive return properties compared to the 1/N portfolio (that is, simply equal-weighting all the available funds) but also when compared to two investable hedge fund indices.

Keywords: bootstrap, familywise error rate, fund-of-funds, performance evaluation

JEL Classification: C12, C14, C22, G11

Suggested Citation

Wolf, Michael and Wunderli, Dan, Fund-of-Funds Construction by Statistical Multiple Testing Methods (September 24, 2009). Institute for Empirical Research in Economics University of Zurich Working Paper No. 445, Available at SSRN: https://ssrn.com/abstract=1477859 or http://dx.doi.org/10.2139/ssrn.1477859

Michael Wolf (Contact Author)

University of Zurich - Department of Economics ( email )

Wilfriedstrasse 6
Zurich, 8032
Switzerland

Dan Wunderli

University of Zurich - Department of Economics ( email )

Zürich, CH-8006
Switzerland
+41 44 634 37 38 (Phone)

HOME PAGE: http://web.mac.com/dan.wunderli

Swiss National Bank

Research
Fraumuensterstr. 8
Zuerich, 8022
Switzerland

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