The tactical and strategic value of hedge fund strategies: a cointegration approach |
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Authors: | Roland Füss Dieter G Kaiser |
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Institution: | (1) Department of Empirical Research and Econometrics, University of Freiburg, Platz der Alten Synagoge, 79085 Freiburg im Breisgau, Germany;(2) Feri Institutional Advisors GmbH, Haus am Park, Rathausplatz 8-10, 61348 Bad Homburg, Germany |
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Abstract: | This paper analyzes long-term comovements between hedge fund strategies and traditional asset classes using multivariate cointegration
methodology. Since cointegrated assets are tied together over the long run, a portfolio consisting of these assets will have
lower long-term volatility. Thus, if the presence of cointegration lowers uncertainty, risk-averse investors should prefer
assets that are cointegrated. Long-term (passive) investors can benefit from the knowledge of cointegrating relationships,
while the built-in error correction mechanism allows active asset managers to anticipate short-run price movements. The empirical
results indicate there is a long-run relationship between specific hedge fund strategies and traditional financial assets.
Thus, the benefits of different hedge fund strategies are much less than suggested by correlation analysis and portfolio optimization.
However, certain strategies combined with specific stock market segments offer portfolio managers adequate diversification
potential, especially in the framework of tactical asset allocation.
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Keywords: | Hedge fund strategies Stock markets Tactical and strategic asset allocation Portfolio optimization Multivariate cointegration analysis Johansen test |
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