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Portfolio allocation with hedge funds: Case study of a Swiss institutional investor

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Abstract

Asset allocation advisers usually use the mean-variance framework to show the benefits of investing in hedge funds. The authors prove that this is not optimal when the assets are not normally distributed and develop a method based on a modified Value-at-Risk for non-normally distributed assets. We take the example of a Swiss pension fund investing part of its wealth in hedge funds and show that computing a portfolio with mean and variance considerably underestimates the risk of the portfolio.

Suggested Citation

  • Favre, Laurent & Galeano, José-Antonio, 2002. "Portfolio allocation with hedge funds: Case study of a Swiss institutional investor," Journal of Financial Transformation, Capco Institute, vol. 4, pages 57-63.
  • Handle: RePEc:ris:jofitr:1284
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    More about this item

    Keywords

    Portfolio management; asset allocation; hedge funds; value-at-risk; Swiss pension funds;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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