Hedge Fund Strategies, Performance & Diversification: A Portfolio Theory & Stochastic Discount Factor Approach

The British Accounting Review, Forthcoming

59 Pages Posted: 3 Jun 2019 Last revised: 18 Jan 2022

See all articles by David Newton

David Newton

University of Bath - School of Management

Emmanouil Platanakis

University of Bath - School of Management

Dimitrios Stafylas

University of York - The York Management School

Charles Sutcliffe

University of Reading - ICMA Centre

Xiaoxia Ye

University of Exeter Business School - Department of Finance

Date Written: January 16, 2022

Abstract

For 5,500 North American hedge funds following 11 different strategies, we analyse the stand-alone performance of these strategies using a stochastic discount factor approach. Employing the same data, we then consider the diversification benefits of each hedge fund strategy when combined with a portfolio of US equities and bonds. We compute the out-of-sample Black-Litterman portfolios, with Bayes-Stein, higher moments, simulations, desmoothed data and allowance for regimes as robustness checks. All but two hedge fund strategies out-perform the market as stand-alone investments; and all but one provide significant diversification benefits. The higher is an investor’s risk aversion, the more beneficial is diversification into hedge funds.

Keywords: Hedge funds, portfolio diversification, Black-Litterman, Bayes-Stein, stochastic discount factors; regimes

JEL Classification: G11

Suggested Citation

Newton, David and Platanakis, Emmanouil and Stafylas, Dimitrios and Sutcliffe, Charles M. and Ye, Xiaoxia, Hedge Fund Strategies, Performance & Diversification: A Portfolio Theory & Stochastic Discount Factor Approach (January 16, 2022). The British Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3388184 or http://dx.doi.org/10.2139/ssrn.3388184

David Newton

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Emmanouil Platanakis

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Dimitrios Stafylas

University of York - The York Management School ( email )

Freboys Lane
Heslington
York, North Yorkshire YO10 5DD
United Kingdom

Charles M. Sutcliffe (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Xiaoxia Ye

University of Exeter Business School - Department of Finance ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

HOME PAGE: http://www.xiaoxiaye.me/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,507
Abstract Views
3,203
Rank
23,372
PlumX Metrics