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Hedge Fund Portfolio Diversification Strategies across the GFC

Author

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  • David E. Allen

    (University of Sydney, University of South Australia, Australia)

  • Michael McAleer

    (National Tsing Hua University, Taiwan, Erasmus University Rotterdam, the Netherlands, Complutense University of Madrid, Spain)

  • Shelton Peiris

    (University of Sydney, Australia)

  • Abhay K. Singh

    (Edith Cowan University, Australia)

Abstract

This paper features an analysis of the effectiveness of a range of portfolio diversication strategies as applied to a set of 17 years of monthly hedge fund index returns on a set of ten market indices representing 13 major hedge fund categories, as compiled by the EDHEC Risk Institute. The 17-year period runs from the beginning of 1997 to the end of August 2014. The sample period, which incorporates both the Global Financial Crisis (GFC) and subsequent European Debt Crisis (EDC), is a challenging one for the application of diversication and portfolio investment strategies. The analysis features an examination of the di- versification benefits of hedge fund investments through successive crisis periods. The connectedness of the Hedge Fund Indices is explored via application of the Diebold and Yilmaz (2009, 2014) spillover index. We conduct a series of portfolio optimisation analyses: comparing Markowitz with naive diversication, and evaluate the relative effectiveness of Markowitz portfolio optimisation with various draw-down strategies, using a series of backtests. Our results suggest that Markowitz optimisation matches the characteristics of these hedge fund indices quite well.

Suggested Citation

  • David E. Allen & Michael McAleer & Shelton Peiris & Abhay K. Singh, 2014. "Hedge Fund Portfolio Diversification Strategies across the GFC," Tinbergen Institute Discussion Papers 14-151/III, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20140151
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    References listed on IDEAS

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    More about this item

    Keywords

    Hedge Fund Diversication; Spillover Index; Markowitz Analaysis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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