Abstract
The article provides an illustration of the Black–Litterman model. It shows how to combine an investor's views with the market equilibrium. This study also sheds light on the behaviour of hedge funds as an asset class. In this article, we re-examine a new optimization approach introduced by Black and Litterman to overcome the weaknesses of the standard mean-variance optimization model. We also consider the resampling technique to refine our results. Our results show that combining the resampling technique with the Black–Litterman model presents the most robust asset allocation. When we consider the case of hedge funds (HFs), we find that the integration of HFs into traditional investment categories indeed improves the portfolio's risk/return profile, for the period 2002–2007. The importance of HFs is less obvious, however, when using the Black–Litterman model with the resampling technique.
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