Stocks, Bonds, and Hedge Funds

How should individual investors diversify? An empirical evaluation of alternative asset allocation policies

“…Moreover, we do not consider alternative asset classes such as hedge funds and private equity for two reasons. First, their diversification potential in the multi-asset case is often found to be limited (e.g., Amin and Kat, 2003;Ennis and Sebastian, 2005;Paton, 2009;and Phalippou and Gottschalg, 2009 To assess the additional diversification potential of bonds and commodities, Figures 1 and 2 illustrate the time series behavior of correlations within the stock markets and across asset classes, respectively. Correlation coefficients are computed using a rolling-window approach based on the previous 60 months.…”

Managed Futures and Hedge Funds: A Match Made in Heaven

“…Recent research, however, has shown that the risk and dependence characteristics of hedge funds are substantially more complex than those of stocks and bonds. Amin and Kat (2003), for example, show that although including hedge funds in a traditional investment portfolio may significantly improve that portfolio's mean-variance characteristics, it can also be expected to lead to significantly lower skewness. The additional negative skewness that arises when hedge funds are introduced in a portfolio of stocks and bonds forms a major risk as one large negative return can destroy years of careful compounding.…”

Hedge Funds: Risk and Return

“…Estimates of survivorship bias by Brown, Goetzmann, and Ibbotson (1999), Brown, Goetzmann, and Park (2001), Liang (2000Liang ( , 2001, and Fung and Hsieh (1997) range from 60 bps to 360 bps a year for various hedge fund types. In a study covering data for a sample period similar to ours, Amin and Kat (2003) estimated survivorship bias at about 200 bps a year. In a study covering a period prior to ours, Ackerman, McEnally, and Ravenscraft (1999) found estimates of survivorship bias that were small and insignificant.…”