Dynamic hedge fund portfolio construction
Harris, Richard D. F.; Mazibas, Murat
Date: 1 November 2009
Publisher
University of Exeter Business School
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Abstract
In this paper, we provide further evidence on the use of multivariate conditional
volatility models in hedge fund risk measurement and portfolio allocation, using
monthly hedge fund index return data for the period 1990 to 2009. Building on
Giamouridis and Vrontos (2007), we consider a broad set of multivariate GARCH
models as well as ...
In this paper, we provide further evidence on the use of multivariate conditional
volatility models in hedge fund risk measurement and portfolio allocation, using
monthly hedge fund index return data for the period 1990 to 2009. Building on
Giamouridis and Vrontos (2007), we consider a broad set of multivariate GARCH
models as well as the simpler exponentially weighted moving average (EWMA)
estimator of RiskMetrics (1996). We find that while multivariate GARCH models
provide some improvement in portfolio performance over static models, they are
generally dominated by the EWMA model. In particular, in addition to providing
better risk-adjusted performance, the EWMA model leads to dynamic allocation
strategies that have substantially lower turnover and could therefore be expected to
involve lower transaction costs. Moreover, we show that these results are robust
across low-volatility and high-volatility sub-periods.
Finance and Accounting
Faculty of Environment, Science and Economy
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