Abstract
In this article, we analyze the returns distribution of hedge funds strategies, the average returns obtained over the past 10 years, and their correlation with a traditional portfolio. The aim is to identify the characteristics of each hedge fund investment strategy in order to be able to construct an optimal hedge fund portfolio for a Swiss pension fund. We show that the classical linear correlation and the classical linear regression cannot be applied for hedge funds. Moreover, we show that only three strategies, convertible arbitrage, market neutral, and CTA, give diversification during market downturns. The techniques used are non-linear regressions and local correlations.
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