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Hedge Fund Portfolios

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).

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Hedge Fund Portfolios

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  1. Hedge Fund Portfolios Ezra Zask Yale University September 26, 2005

  2. Benefits of Hedge Funds

  3. 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)

  4. Hedge Fund Returns

  5. Assets Risk Return Profile

  6. Hedge Fund Style Beta and Alpha

  7. Portfolio Optimization • Requirements for Mean Variance Optimization • Returns • Normally Distributed • Accurate Data • Time Frame • Standard Deviation • Constant over time • Correlations • Lower is better

  8. Survivorship and Backfill Bias

  9. Tremont Style Statistics

  10. Normal Distribution?

  11. Hedge Funds in Portfolios

  12. Hedge Funds in Portfolios

  13. Efficient Frontier

  14. Efficient Frontier

  15. Hedge Fund Styles

  16. Hedge Fund Styles

  17. Background Information:Why Invest in Alternatives?

  18. 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

  19. Alternatives’ returns are not highly correlatedwith traditional investments. Alternative Asset Correlations(1)(2) January 1994 to December 2003 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

  20. 25% alternatives(2) 10% alternatives(2) No alternatives(3) Alternatives enhance traditionalinvestment portfolios. Notes: (1) For illustrative purposes only (2) These portfolios include US Equity (S&P 500), Int’l 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), Int’l Equity (MSCI EAFE) and US Fixed Income (Lehman Aggregate Bond Index)

  21. Fund of Funds Portfolios

  22. Risk Exposure by Strategy

  23. Style Risk Return

  24. Style Correlations 1/1994-6/2005

  25. Problems with Portfolio Optimization1990-2005

  26. Unconstrained Optimization 1990-1995

  27. 5%-20% Optimization1990-2005

  28. 5%=20% Optimization1990-2005

  29. 5%=20% Optimization1990-2005

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