Hedge funds in portfolios of risk-averse investors |
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Authors: | Matthew Hood John R Nofsinger |
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Institution: | 1.College of Business at the University of Southern Mississippi in Hattiesburg;2.College of Business at Washington State University in Pullman |
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Abstract: | We find that adding a hedge fund to an optimally weighted portfolio of stocks and T-bills generally increases the utility
of an investor. From a sample of hedge funds with returns from 1996 to 2005, the certainty equivalent was an average of five
basis points (monthly) higher with a ten percent allocation into a hedge fund. Funds from different style categories require
different allocations into the stock market, but nearly all funds improved performance. Contrary to popular opinion, we find
that highly risk-averse investors gain even more than less risk-averse investors by adding a hedge fund into their portfolio. |
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