An Optimization Strategy for Enhancing the Performance of Fund of Funds Portfolios

Posted: 21 May 2019

See all articles by Glen A. Larsen

Glen A. Larsen

Indiana University - Kelley School of Business - Department of Finance

Bruce G. Resnick

Wake Forest University - Schools of Business

Date Written: September 10, 2011

Abstract

Previous research provides evidence that much of the cross-sectional variation in equity returns can be explained by firm characteristics or sectors such as market capitalization, price-to-earnings ratios, change in operating earnings, and book-to-market ratios. One popular money management technique is to construct a portfolio (fund) using other managed portfolios (funds). The resulting overall portfolio is generally referred to as a fund of funds. This study demonstrates the potential for performance enhancement in a fund of funds when portfolio optimization techniques are employed on sector funds in order to construct the overall fund. Specifically, ex-ante optimization over sector funds that are constructed on the basis of market capitalization, price-to-earnings ratios, change in operating earnings, and book-to-market ratios demonstrates the potential for enhancing an overall equity fund performance relative to value-weighted and equal-weighted benchmark portfolios constructed from the population of stocks from which the sector portfolios are formed.

Keywords: portfolio diversification, fund of funds, performance enhancement, parameter uncertainty

JEL Classification: G11

Suggested Citation

Larsen, Glen A. and Resnick, Bruce G., An Optimization Strategy for Enhancing the Performance of Fund of Funds Portfolios (September 10, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1923853 or http://dx.doi.org/10.2139/ssrn.1923853

Glen A. Larsen (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
317-274-3794 (Phone)

Bruce G. Resnick

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7659
United States
336-758-4581 (Phone)
336-758-4514 (Fax)

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