Diversification Benefits For Investors Research Articles

The diversification benefits of cryptocurrency factor portfolios: Are they there?

AbstractWe investigate the out-of-sample diversification benefits of cryptocurrencies from a generalised perspective, a cryptocurrency-factor level, with traditional and machine-learning-enhanced asset allocation strategies. The cryptocurrency factor portfolios are formed in an analogous way to equity anomalies by using more than 2000 cryptocurrencies. The findings indicate that a stock–bond portfolio incorporating size- and momentum-based cryptocurrency factors can achieve statistically significant out-of-sample diversification benefits for investors with different risk preferences. Additionally, machine-learning-enhanced asset allocation strategies can boost the traditional approaches by enriching (shrinking) the distributions of weights allocated to potentially effective cryptocurrency factors. Our findings are robust to (i) the inclusion of transaction costs, (ii) an alternative benchmark portfolio, and (iii) a rolling-window estimation scheme.

Asymmetric and time-frequency co-movements among innovation-themed investments and carbon emission efficiency: Thematic investing and hedging opportunities.

This study is aimed at investigating the asymmetric and time-frequency co-movements and the hedge or safe-haven properties of carbon efficient indices, the MSCI ACWI Sustainable Impact, and MSCI World EGS indices, in relation to technology and innovation-themed investments. In doing so, the ADCC-GJR-GARCH and wavelet coherence techniques are applied to a daily return series ranging from January 2019 to January 2023. Findings of the ADCC-GJR-GARCH model show negative and insignificant asymmetric linkage among underlying indices during the sample period. The S&P 500 carbon efficient index (CEI) acts as a strong hedge or safe-haven for technology and innovation-themed indices during tranquil and tumultuous periods. The MSCI ACWI Sustainable Impact, MSCI World EGS, and carbon efficient indices except for S&P 500 CEI exhibit weak hedge or safe-haven attributes. Wavelet coherence reveals negative (positive) co-movements between the thematic and carbon efficient indices in short-term (medium-term and long-term) horizons with consistent leading behavior of thematic indices to carbon efficient indices outcomes. It justifies the presence of short-lived hedging or safe-haven characteristics in the thematic domain for investors. These strong and weak hedge or safe-haven characteristics of low carbon and sustainability indices reveal that adding low carbon efficient and sustainable investments to a portfolio result in considerable diversification benefits for investors who tend to take minimal risk in both tranquil and tumultuous periods. The current findings imply that financial institutions, thematic investing companies, and governments need to encourage carbon efficient technology transfer and innovation-themed investments by increasing the fund allocations in underlying asset classes. Policy-making and regulatory bodies can encourage investors to make carbon-efficient and thematic investments and companies to issue carbon-efficient stocks or investments to safeguard social and economic risks during fragile periods. These investments can offer greater opportunities to combat the intensity of economic shocks on portfolios for responsible or sustainable investors.

A Note on the Transmission of Policy Uncertainty Shocks on Asia-Pacific Stock Returns

This study explores the transmission of various policy uncertainty shocks—such as financial market uncertainty (using the Chicago Board Options Exchange Volatility Index), macroeconomic policy uncertainty (using the Global Economic Policy Uncertainty), and anthropogenic uncertainty (using geopolitical risks)—to Asia-Pacific country (APC) stock returns. We adapt a homogeneous panel vector autoregressive model for the distinct analysis of emerging and advanced APCs. Our major findings are that 1) APC stocks are vulnerable to financial and macroeconomic policy uncertainty shocks but less affected by geopolitical risks and 2) the negative impacts of policy uncertainty indicators are greater and longer lasting in advanced APCs than in emerging APCs. The more resilient emerging APC stocks have diversification benefits for investors. Our findings are robust to considerations of nominal and real stock returns.

Modelling the quantile cross-coherence between exchange rates: Does the COVID-19 pandemic change the interlinkage structure?

This paper examined the presence of daily returns coherence and spillover between 30 forex markets over the complete sample and crisis sub-periods. We mainly employed the quantile cross-spectral approach of Barunik and Kley (2019) to measure returns coherence among different investment horizons, while returns spillover is examined using the network connectedness approach. During the COVID-19 period, we found evidence supporting the interdependence hypothesis as opposed to the segregation model. This turns out to be significantly more accurate in the long-run horizon period under the 95%|95% return arrangement. In contrast, the global financial crisis is found to bring more diversification benefits for investors under the same arrangement. Furthermore, the results from ESDC-based analysis revealed some similarities with that from COVID-19 due to the absence of clearly significant negative interlinkages between the pairs in the sample. Lastly, the additional network connectedness analysis made the European (Belgian franc) FX market the primary receiver of shocks during the COVID-19 (European and financial) period. Our results carry significant implications for investors and policymakers concerning timely portfolio rebalancing and performing more organized monetary policies, respectively.

Hedge Fund Alpha: What about Drawdowns?

The author reviews the relative risks of hedge fund investing using various commonly used measures, including market betas, correlations, and portfolio drawdowns. Historically, the data show that hedge funds have hedged a fair degree of systematic market risk, especially in the early years, offering meaningful diversification benefits to traditional stock/bond portfolios. However, the diversification benefits for investors in hedge funds have since declined, though they have not altogether been eliminated. Most recently, during the 2020 pandemic, modest drawdown benefits bore out for hedge fund investors, although again much less so than in the earlier years. <b>Key Findings</b> ▪ This article extends “Hedge Fund Alpha: Cycle or Sunset” (Sullivan 2021) with a focus on the relative risk of hedge funds versus a stock-only as well as more diversified portfolios that seek to blend hedge funds, stocks, and bonds. ▪ The hedging away of systematic risk by hedge funds appears to be diminishing in recent years, in part due to rising correlations between stocks and hedge funds, now approaching 90%. ▪ Drawdowns for various hedge fund composite portfolios during the turbulent periods of 2008 and 2020 have been more in line with those seen by a traditional 50/50 stock/bond portfolio. ▪ However, within the universe of hedge funds, some strategies have delivered more meaningful diversification benefits.

Islamic stock markets and COVID-19-induced shocks: simulations with global VAR approach

PurposeThis paper aims to make the first attempt to study the transmission of COVID-19 pandemic-induced shocks to the global Islamic stock markets in the midst of the overall macroeconomic environment and cross-country trade linkages. This is made possible by constructing a global vector autoregressive (GVAR) model and with it the authors arrive at noteworthy conclusions.Design/methodology/approachThe paper estimates both fixed and time-varying weights GVAR models for 15 Islamic stock markets with 5,000 bootstrap replications and reports impulse response functions. It simulates four shocks associated with the pandemic: first, a standard error negative shock to oil price; second, a standard error negative shock to the global Islamic stock markets; third, a standard error positive shock to equity-based uncertainty index; and fourth, a standard error negative shock to economic activity (inflation).FindingsThe paper shows that the pandemic engenders immediate negative impacts on the Islamic stock markets with the biggest impacts borne by the USA and China and the least by markets in the Middle East. The study documents the magnitudes of the responses to the shocks and shows that the impacts of the pandemic will take about 20 months to wither completely.Originality/valueThe findings throw up diversification benefits for investors toward the UAE, Oman, Bahrain and other Middle East markets especially during crisis. It further reveals the need for counter-cyclical measures in all countries to curtail the negative impacts of the pandemic which could linger for up to 20 months.

What About Hedge Fund Drawdowns?

In this paper, I review hedge fund risk using various commonly used measures including market betas, correlations, and porfolio drawdowns. We see a picture emerge that shows hedge funds have historically hedged a fair degree of systematic market risk, especially in the early years, offering meaningful diverisification benefits to traditional stock/bond portfolios. However, the diversification benefits for investors in hedge funds have since seemingly lessened, even if not altogether eliminated. Most recently, modest benefits bore out for hedge fund investors during the 2020 pandemic, although again much less so than in the earlier years.

Time frequency analysis of the commonalities between Bitcoin and major Cryptocurrencies: Portfolio risk management implications

This paper uses wavelet coherence and cross wavelet transform approaches to examine co-movement between Bitcoin and five major cryptocurrencies (Dash, Ethereum, Litecoin, Monero and Ripple) and their portfolio risk implications. The results show evidence of co-movements in time frequency space with leading relationships of Bitcoin with Dash, Monero and Ripple, lagging relationship with Ethereum, and out of phase movements with Litecoin. By considering different portfolios (risk-minimizing portfolio, equally weighted portfolio and hedging portfolio), we show evidence that a mixed portfolio (Bitcoin with other cryptocurrencies) provides better diversification benefits for investors and portfolio managers. Finally, an Ethereum-Bitcoin (Monero-Bitcoin) hedging portfolio offers the highest risk reductions and hedging effectiveness under medium and long term (short term) horizon. The results of downside risk reductions are time horizon dependent.

Performance of global listed infrastructure investment in a mixed asset portfolio

This paper seeks to examine global infrastructure investment performance compared with other global asset classes such as stocks, bonds, real estate investment trusts, property, hedge funds and private equity. The paper examines the level of correlation of infrastructure with the other assets classes largely reflecting the diversification potential of infrastructure within a mixed asset portfolio. Monthly return indices obtained from Thomson Reuters DataStream over a 10-year period (2001–2010) facilitated the examination of listed infrastructure investment return characteristics including average annual return, annual risk, Sharpe index, mean variance portfolio and maximum return portfolio. Efficient portfolio frontiers were computed using risk solver platform version 11. From a global perspective, investments in infrastructure show a robust comparative performance over the 10-year timeframe (2001–2010). The study is supportive of the argument that the inclusion of infrastructure in a mixed asset portfolio enhances investment performance. The role of global infrastructure in a multi-asset portfolio is shown to be more risk reduction rather than enhancement of return. From a practical viewpoint, the systematic allocation of between 10 and 17.63% of infrastructure into a global investment portfolio can significantly enhance diversification benefits for investors.

Tactical Asset Allocation and Commodity Futures

In this article the authors examine the diversification benefits of adding managed and unmanaged commodity futures to a traditional portfolio that consists of U.S. equities, foreign equities, corporate bonds, and Treasury bills from 1973 through 1999. Consistent with previous evidence, they find that commodity futures substantially enhance portfolio performance for investors, and managed futures provide the greatest benefit. They show that the benefits of adding commodity futures (both managed and unmanaged) accrue almost exclusively when the Federal Reserve is following a restrictive monetary policy. The results suggest that metals and agricultural futures contracts offer the most diversification benefits for investors. Overall, the findings indicate that investors should gauge monetary conditions to determine the optimal allocation of commodity futures within a portfolio, and whether a short or a long position should be established in a particular type of contract.

The Diversification Benefits of Commodities and Real Estate in Alternative Monetary Conditions

Previous research has shown that returns (and variability of returns) to traditional asset classes are significantly influenced by Federal Reserve monetary policy. Unfortunately, while providing evidence that returns from traditional asset classes are higher and less volatile during expansive monetary policy periods, previous research has not identified asset classes that have attractive return patterns in restrictive monetary policy periods. This analysis extends that research into broad alternative investment classes including several real estate and commodity indexes. The results indicate that commodity futures provide attractive return patterns while real estate offers little diversification benefits for investors with traditional stock and bond portfolios. Both commodity and real estate volatility patterns are found to be similar to traditional asset classes—higher volatility in restrictive monetary policy periods.

Performance Characteristics of Emerging Capital Markets

Capital markets in developing countries have become an important asset class. These emerging markets are commonly associated with high returns, high volatility, and diversification benefits for investors in developed markets. We used the Emerging Markets Data Base provided by the International Finance Corporation to examine the risk and return characteristics of emerging markets. Contrary to the results often presented in the popular press, we found that these markets have not produced high levels of compound returns relative to U.S. stock markets for the 20-year time period ending in June 1995. They have experienced a high level of volatility, but they also have consistently provided diversification benefits when combined with developed market portfolios.

Diversification Benefits for Investors in Real Estate

Diversification Benefits for Investors in Real Estate