Diversification with risk factors and investable hedge fund indices

Boigner, Philip; Gadzinski, Grégory

doi:10.1057/jam.2015.10

“…Defining drawdown in relative percentage terms as in equation ( 2) is common in the literature, especially when reporting on the performance of a portfolio, e.g. see [3,10,12,32,37].…”

Section: Preliminariesmentioning

confidence: 99%

A nonlinear optimisation model for constructing minimal drawdown portfolios

Valle,

Beasley

2019

Preprint

0

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In this paper we consider the problem of minimising drawdown in a portfolio of financial assets. Here drawdown represents the relative opportunity cost of the single best missed trading opportunity over a specified time period. We formulate the problem (minimising average drawdown, maximum drawdown, or a weighted combination of the two) as a nonlinear program and show how it can be partially linearised by replacing one of the nonlinear constraints by equivalent linear constraints.Computational results are presented (generated using the nonlinear solver SCIP) for three test instances drawn from the EURO STOXX 50, the FTSE 100 and the S&P 500 with daily price data over the period 2010-2016. We present results for long-only drawdown portfolios as well as results for portfolios with both long and short positions. These indicate that (on average) our minimal drawdown portfolios dominate the market indices in terms of return, Sharpe ratio, maximum drawdown and average drawdown over the (approximately 1800 trading day) out-of-sample period.

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“…5 The method of Geltner (1991Geltner ( , 1993 has been widely used for real estate returns, and applied to hedge funds by Bekkers et al (2009); Brooks and Kat (2002); and Hoevenaars et al (2008). Getmansky et al (2004) developed a method which they used to adjust hedge fund returns, and their method has also been used on hedge funds by Boigner, and Gadzinski (2015). Okunev and White (2004) adjusted hedge fund returns using their own method, which has also been used by Cavenaile et al (2011) and Bird et al (2013) for de-smoothing hedge find returns.…”

Section: C Normality Testsmentioning

confidence: 99%

Harmful Diversification: Evidence from Alternative Investments

Platanakis

¹

,

Σάκκας

²

,

Sutcliffe

³

2018

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Alternative assets have become as important as equities and fixed income in the portfolios of major investors, and so their diversification properties are also important. However, adding five alternative assets (real estate, commodities, hedge funds, emerging markets and private equity) to equity and bond portfolios is shown to be harmful for US investors. We use 19 portfolio models, in conjunction with dummy variable regression, to demonstrate this harm over the 1997-2015 period. This finding is robust to different estimation periods, risk aversion levels, and the use of two regimes. Harmful diversification into alternatives is not primarily due to transactions costs or non-normality, but to estimation risk. This is larger for alternative assets, particularly during the credit crisis which accounts for the harmful diversification of real estate, private equity and emerging markets. Diversification into commodities, and to a lesser extent hedge funds, remains harmful even when the credit crisis is excluded.

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“…5 The method of Geltner (1991Geltner ( , 1993 has been widely used for real estate returns, and applied to hedge funds by Bekkers et al (2009); Brooks and Kat (2002); and Hoevenaars et al (2008). Getmansky et al (2004) developed a method which they used to adjust hedge fund returns, and their method has also been used on hedge funds by Boigner, and Gadzinski (2015). Okunev and White (2004) adjusted hedge fund returns using their own method, which has also been used by Cavenaile et al (2011) and Bird et al (2013) for de-smoothing hedge find returns.…”

mentioning

confidence: 99%

Harmful diversification: Evidence from alternative investments

Platanakis

¹

,

Σάκκας

²

,

Sutcliffe

³

2019

The British Accounting Review

View full text Add to dashboard Cite

Alternative assets have become as important as equities and fixed income in the portfolios of major investors, and so their diversification properties are also important. However, adding five alternative assets (real estate, commodities, hedge funds, emerging markets and private equity) to equity and bond portfolios is shown to be harmful for US investors. We use 19 portfolio models, in conjunction with dummy variable regression, to demonstrate this harm over the 1997-2015 period. This finding is robust to different estimation periods, risk aversion levels, and the use of two regimes. Harmful diversification into alternatives is not primarily due to transactions costs or non-normality, but to estimation risk. This is larger for alternative assets, particularly during the credit crisis which accounts for the harmful diversification of real estate, private equity and emerging markets. Diversification into commodities, and to a lesser extent hedge funds, remains harmful even when the credit crisis is excluded.

show abstract

Diversification with risk factors and investable hedge fund indices

Cited by 3 publications

References 28 publications

A nonlinear optimisation model for constructing minimal drawdown portfolios

A nonlinear optimisation model for constructing minimal drawdown portfolios

Harmful Diversification: Evidence from Alternative Investments

Harmful diversification: Evidence from alternative investments

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