Hedge Fund Portfolios

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Hedge Fund Portfolios. Ezra Zask Yale University September 26, 2005. Benefits of Hedge Funds. Equity Hedge. Relative Value. MSCI World. Event Driven. Riskier than traditional investments?. MSCI World. Asia Crisis (8/97). Iraq Crisis (8/90). September 11 (9/01). Russia Crisis (8/98). - PowerPoint PPT Presentation

Transcript of Hedge Fund Portfolios

  • Hedge Fund PortfoliosEzra ZaskYale UniversitySeptember 26, 2005

  • Benefits of Hedge Funds

  • Riskier than traditional investments?Iraq Crisis (8/90)Asia Crisis (8/97)Russia Crisis (8/98)September 11 (9/01)MSCI World

  • Hedge Fund Returns

  • Assets Risk Return Profile

  • Hedge Fund Style Beta and Alpha

  • Portfolio OptimizationRequirements for Mean Variance OptimizationReturnsNormally DistributedAccurate DataTime FrameStandard DeviationConstant over timeCorrelationsLower is better

  • Survivorship and Backfill Bias

  • Tremont Style Statistics

  • Normal Distribution?

  • Hedge Funds in Portfolios

  • Hedge Funds in Portfolios

  • Efficient Frontier

  • Efficient Frontier

  • Hedge Fund Styles

  • Hedge Fund Styles

  • Background Information:Why Invest in Alternatives?

  • Alternative assets offer attractiverisk adjusted returns.Notes:(1) Sources as follows: private equity and venture capital data from Venture Economics, hedge fund composite and distressed data from Hedge Fund Research (HFR) and all other data from Pertrac database (2) Annualized volatilities computed from monthly and quarterly series under the assumption of independent returns

  • Alternatives returns are not highly correlatedwith traditional investments.Notes:(1) Sources as follows: hedge fund data from Hedge Fund Research (HFR); private equity and venture capital data from Venture Economics and all other data from Pertrac database (2) The correlation between S&P 500 and Lehman Aggregate Bond Index over the same time period is 0.02 Alternative Asset Correlations(1)(2) January 1994 to December 2003

  • Alternatives enhance traditionalinvestment portfolios.Notes:(1) For illustrative purposes only(2) These portfolios include US Equity (S&P 500), Intl Equity (MSCI EAFE), US Fixed Income (Lehman Aggregate Bond Index), HedgeFund Composite (Hedge Fund Research (HFR)), Distressed Debt (third party provider), Private Equity (Venture Economics) and Venture Capital (Venture Economics) (3) This portfolio includes US Equity (S&P 500), Intl Equity (MSCI EAFE) and US Fixed Income (Lehman Aggregate Bond Index)

  • Fund of Funds Portfolios

  • Risk Exposure by Strategy

  • Style Risk Return

  • Style Correlations 1/1994-6/2005

  • Problems with Portfolio Optimization1990-2005

  • Unconstrained Optimization 1990-1995

  • 5%-20% Optimization1990-2005

  • 5%=20% Optimization1990-2005

  • 5%=20% Optimization1990-2005