23 Pages Posted: 4 May 2006
We consider portfolio allocation in which the underlying investment instruments are hedge funds. Benchmarks and conditional-value-at-risk motivate a family of utility functions involving the probability of outperforming a benchmark and expected shortfall from another benchmark. Non-normal return vectors with prescribed marginal distributions and correlation structure are modeled and simulated using the normal-to-anything method. A Monte Carlo procedure is used to obtain, and establish the quality of, a solution to the associated portfolio optimization model. Computational results are presented on a problem in which we construct a fund of 13 CSFB/Tremont hedge-fund indices.
Keywords: Portfolio choice, expected regret, hedge funds, fund of funds, portfolio optimization, Monte Carlo simulation
JEL Classification: C15, C61, G11
Suggested Citation: Suggested Citation
Morton, David and Popova, Ivilina and Popova, Elmira, Efficient Fund of Hedge Funds Construction Under Downside Risk Measures. Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=900006
By Bing Liang