In this paper we analyze the contribution of hedge funds in optimal asset allocations for different investor clienteles. The preferences of specific institutional investors are captured by implementing a Bayesian asset allocation framework that incorporates heterogeneous expectations regarding...

We investigate behavior of optimal hedge fund leverage in a fund that has a compensation contract with high-water mark and hurdle rate provisions. A risk neutral fund manager can continuously reallocate assets while she obtains management and performance fees in discrete time moments. We find...

We use proprietary data to examine factors that lead hedge fund managers to offer hurdle rates and investigate relative hedge fund performance based on risk adjusted returns. Using data from 3,571 hedge funds over a 15 year period, we find that funds that do not offer a hurdle rate outperform...

While the use of dynamic factor models for Hedge Fund Replication (HFR) has proven to be superior to standard OLS methodologies (e.g., Roncalli and Weisang, 2009a,b), current factor selection methodology in these dynamic settings by means of direct PCA-based estimation of the factors (e.g.,...

This report is a brief of the actual research and discusses two ways of asset allocation in Hedge Funds to generate alpha over the fund of hedge funds. The fund of hedge funds have fallen out of favour for investors seeking alternative investments as they have lagged the general market returns....

Hedge funds shift investment strategies in response to changing market conditions. We adjust hedge fund returns for their risks in an estimation that accounts for regime-switching effects. Index factors are used to capture the returns from buy-and-hold strategies followed by hedge fund. Besides,...

Hedge funds' extensive use of derivatives, short-selling, and leverage and their dynamic trading strategies create significant non-normalities in their return distributions. Hence, the traditional performance measures fail to provide an accurate characterization of the relative strength of hedge...

Hedge funds' extensive use of derivatives, short-selling, and leverage and their dynamic trading strategies create significant non-normalities in their return distributions. Hence, the traditional performance measures fail to provide an accurate characterization of the relative strength of hedge...

In this paper, we develop a theoretical model of fund of hedge fund net leverage and alpha where the cost of borrowing is increasing with net leverage, thereby impacting the performance. We use this model to determine the conditions under which the leverage has a negative or a positive impact on...

We provide evidence that speculative capital of hedge funds is a key determinant for the profitability of optimal carry and momentum strategies in futures markets across asset classes. We construct optimal carry and momentum portfolios from the perspective of a utility maximizing risk averse...