Hedge fund portfolio construction: A comparison of static and dynamic approaches

Why Is Investors' Mutual Fund Market Allocation Far from the Optimum?

“…Our analysis highlights the importance of considering funds' characteristics and the structure of the mutual fund market in order to optimize a portfolio of funds. This complements a strand of the literature that emphasises considering different assumptions about the funds' return distribution or the investor's objective function (see Morton et al, 2006;Giamouridis and Vrontos, 2007;Harris and Mazibas, 2013). Our main hypothesis is validated and the type of investor at which a fund is aimed, retail vs. wholesale, and the fund's risk profile are confirmed as factors that influence the varying degrees of competition in mutual fund market segments.…”

A Fund of Hedge Funds Under Regime Switching

“…In the context of portfolio optimization, Hoecht et al [2008] analyze the positive effect of adding an Asian hedge fund index to a traditional portfolio of bonds and stocks. The work of Giamouridis and Vrontos [2007] is closest to the current investigation. Among other things, these authors employ a Markov-switching model to describe hedge fund returns, allowing for time-varying covariances, but with expected returns that are not SPRING 2013 regime-dependent.…”

Portfolio Allocation of Hedge Funds

“…In the switching approach, correlation can only take a finite number of values. We use the dynamic specification proposed by Pelletier (2006) and applied to hedge fund allocation problem by Giomouridis and Vrontos (2007). More generally, regime-switching models are used in the hedge funds literature in a number of contexts including measuring the systemic risk (Chan et al, 2006, Billio et al, 2010, studying serial correlations (Getmansky et al, 2004) and detecting switching strategies (Alexander and Dimitiu, 2004).…”

“…returns. For example, Giomouridis and Vrontos (2007) are the first to use dynamic specification for the covariance parameters and to evaluate the consequences at the portfolio allocation level. More generally, we can think that the standard methods used for portfolio allocation are inadequate since non null skewness and high kurtosis, relative to traditional asset classes, are observed in the monthly returns of hedge funds 5 .…”