Abstract
Research background: Institutional investors such as: commercial banks, pension funds, and insurance companies are constantly looking for low-risk stable investment opportunities, whereas one of the solutions can be a simulated portfolio. This research takes a look at the incentive to invest in government debt portfolios, as it can outperform the returns of deposit accounts.
 Purpose of the article: This study considers several classic methods of portfolio constriction and includes the basis of debt instruments that have not been a research topic for a long period of time. At the same time, this paper analyzes the classic methods of modern portfolio theory with a Sharpe ratio as an indicator of efficiency.
 Methods: The constructed portfolio consists of four elements from different countries: two government obligations and two bond indexes, aiming to employ international diversification. All the data was collected for the period of 12 years in order to represent the consequences of accrued recessions.
 Findings & Value added: The past two severe financial crises created a higher demand for stable investments, and more investors are ready to compromise a higher return for it. There-fore, the results of this paper represent a simulation of low-risk hedge fund portfolio construction with the use of highly rated debt instruments.
Highlights
The institutional players use several tools or combinations of them in order to construct efficient portfolio, whereas all of those tools have a number of constraints with respect to risk-return trade-off
Majority of the available studies are focused on the stock portfolios analysis and not on the full debt market portfolios, when pension funds and insurance companies greatly contribute to the overall investment in the low-risk debt instruments, due to the imposed government regulations
There have been a vast number of studies that concerned the field of portfolio construction, but a large part of it was focused on high-risk assets
Summary
The institutional players use several tools or combinations of them in order to construct efficient portfolio, whereas all of those tools have a number of constraints with respect to risk-return trade-off. Majority of the available studies are focused on the stock portfolios analysis and not on the full debt market portfolios, when pension funds and insurance companies greatly contribute to the overall investment in the low-risk debt instruments, due to the imposed government regulations. The current market conditions have been negatively affecting the debt market, making it crucial to evaluate the conditions, and to provide an approximation of the possible risk levels, or expected returns achieved from the low-risk portfolios that hedge funds are using. The constructed portfolio is a simulation of a low-risk hedge fund portfolio that requires long-term stable investments on the basis of two index funds, and two government obligations graded AAA by the rating agencies. The result provides an analysis of the historical fluctuations in bond yields and forecasts future expected return on a similar risk level of investment
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