Style Allocation Research Articles

Further Evidence on Hedge Fund Return Predictability

In this article, the authors provide new evidence of the out-of-sample predictability of hedge fund returns. They first adopt a rigorous model-construction process to find the best predictive variables for each hedge fund style. They then examine whether the perceived predictability could translate into profitable “tactical style” allocation strategies. Nine out ten hedge funds strategies outperform the passive benchmark. For robustness, they test the performance of optimized strategies and confirm the profitability of tactical style allocation based on the prediction of our multifactor models. <b>TOPICS:</b>Real assets/alternative investments/private equity, statistical methods, portfolio construction, performance measurement

The Effect of Market Regimes on Style Allocation

We analyse time-varying risk premia and the implications for portfolio choice. Using Markov Chain Monte Carlo (MCMC) methods, we estimate a multivariate regime-switching model for the Carhart (1997) four-factor model. We find two clearly separable regimes with different mean returns, volatilities, and correlations. In the High-Variance Regime, only value stocks deliver a good performance, whereas in the Low-Variance Regime, the market portfolio and momentum stocks promise high returns. Regime-switching induces investors to change their portfolio style over time depending on the investment horizon, the risk aversion, and the prevailing regime. Value investing seems to be a rational strategy in the High-Variance Regime, momentum investing in the Low-Variance Regime. An empirical out-of-sample backtest indicates that this switching strategy can be profitable, but the overall forecasting ability for the regime-switching model seems to be weak compared to the iid model.

Tactical Style Allocation—A New Form of Market Neutral Strategy

Tactical Style Allocation—A New Form of Market Neutral Strategy

Predictability in Hedge Fund Returns (corrected)

A significant amount of research has been devoted to the predictability of traditional asset classes, but little is known about the predictability of returns emanating from alternative vehicles, such as hedge funds. We attempt to fill this gap by documenting evidence of predictability in hedge fund returns. Using multifactor models for the return on nine hedge fund indexes, for which the factors were chosen to measure the many dimensions of financial risk, we found strong evidence of significant predictability in hedge fund returns. We also found that the benefits of “tactical style allocation” portfolios are potentially large. We obtained even more spectacular results for an equity-oriented portfolio that mixed traditional and alternative investment vehicles and for a debt-oriented portfolio that mixed traditional and alternative investment vehicles. These results do not seem to have been significantly affected by the presence of reasonably high transaction costs.

Tactical Style Allocation—A New Form of Market Neutral Strategy

Even though there is little evidence of predictability in stock specific risk, most equity market neutral managers still rely on stock picking as the preferred way to generate abnormal returns. In this article, the authors document the benefits of a new form of market-neutral portfolio strategy that aims at delivering absolute return over the full business cycle through systematic equity style timing decisions. Using a robust multi-factor recursive modeling approach, they find strong evidence of predictability in value and size style differentials. They use these econometric forecasts to generate systematic style timing allocation decisions. These portfolio decisions can be implemented using Exchange Traded Funds on US style indexes.

Mutual funds: risk and performance analysis for decision making

Preface. 1. Understanding Mutual Funds. 2. Mutual Fund Service Advantages. 3. Mutual Fund Service Advantages: Professional Management. 4. Mutual Fund Service Disadvantages. 5. Mutual Fund Service Disadvantages: Expenses. 6. Long-Term Investing in Mutual Funds. 7. Portfolio Diversification Risk and Equity Style Allocation. 8. Mutual Fund Performance Measures and Buy/Sell Decision Criteria. 9. Mutual Fund Performance and Portfolio Investment Style Allocations. 10. Actively Managed versus Passively Managed Funds: The Search for Managers. 11. Mutual Funds: The Next Generation. 12. Economic and Market Indicators: Knowledge, Not Faith. Index.

Portfolio Optimization and Hedge Fund Style Allocation Decisions

This article attempts to evaluate the out-of-sample performance of an improved estimator of the covariance structure of hedge fund index returns, focusing on its use for optimal portfolio selection. Using data from CSFB/Tremont hedge fund indices, we find that ex-post volatility of minimum variance portfolios generated using implicit factor-based estimation techniques is between 1.5 and 6 times lower than that of a value-weighted benchmark, such differences being both economically and statistically significant. This strongly indicates that optimal inclusion of hedge funds in an investor portfolio can potentially generate a dramatic decrease in the portfolio volatility on an out-of-sample basis. Differences in mean returns, on the other hand, are not statistically significant, suggesting that the improvement in terms of risk control does not necessarily come at the cost of lower expected returns.

Evidence of Predictability in Hedge Fund Returns and Multi-Style Multi-Class Tactical Style Allocation Decisions

While there has been a significant amount of research on the predictability of traditional asset classes, very little is known about the predictability of returns emanating from alternative vehicles such as hedge funds. This is perhaps surprising, given that significant attempts at structuring the alternative investment markets have occurred over the last decade which now allow investors to implement dynamic trading strategies in hedge fund indexes. This paper attempts to fill this gap by documenting evidence of predictability in hedge fund index returns, focusing on their use for tactical style allocation decisions. Using data from nine CSFB-Tremont hedge fund indexes, we find that there is strong evidence of very significant predictability in hedge fund returns. We also find that the benefits in terms of tactical style allocation portfolios are potentially very large. Even more spectacular results are obtained both for an equity-oriented portfolio mixing traditional and alternative investment vehicles, and for a fixed-income oriented portfolio mixing traditional and alternative investment vehicles. These results do not seem to be significantly affected by the presence of reasonably high transaction costs.

Portfolio Optimization and Hedge Fund Style Allocation Decisions

This paper attempts to evaluate the out-of-sample performance of an improved estimator of the covariance structure of hedge fund index returns, focusing on its use for optimal portfolio selection. Using data from CSFB-Tremont hedge fund indices, we find that ex-post volatility of minimum variance portfolios generated using implicit factor based estimation techniques is between 1.5 and 6 times lower than that of a value-weighted benchmark, such differences being both economically and statistically significant. This strongly indicates that optimal inclusion of hedge funds in an investor portfolio can potentially generate a dramatic decrease in the portfolio volatility on an out-of-sample basis. Differences in mean returns, on the other hand, are not statistically significant, suggesting that the improvement in terms of risk control does not necessarily come at the cost of lower expected returns.

The Performance, Asset Allocation, and Investment Style of International Equity Managers

This paper evaluates the performance of 114 international equity managers over the January 1988–December 1997 period. Performance tests are conducted using Sharpe (1966) and Jensen (1968) performance methodologies. The managers are divided into mutual fund (n=54) and separately managed fund (n=60) investment management categories. Each management category is further divided by foreign and world (global) investment objectives. Three major findings are reported. First, international equity managers, on average, were unable to outperform the MSCI World market proxy during the sample period. However, world managers did perform better than their foreign counterparts. Second, geographic asset allocation and equity style allocation decisions enhanced the performance of international managers during the sample period. Third, separately managed funds outperformed mutual funds during the period studied when mutual fund returns are measured net of management fees. The apparent managed performance advantage abates, however, when mutual fund returns are adjusted to include management fees. Thus, we find no significant difference in the performance of the management categories when returns are measured gross of fees.

Management Style and Asset Allocation in Real Estate Portfolios

Management Style and Asset Allocation in Real Estate Portfolios