Boost your traditional portfolio: Activate traditional asset classes with alternative investments

Jaggi, Andreas; Jeanneret, Pierre; Scholz, Stefan
August 2011
Journal of Derivatives & Hedge Funds;Aug2011, Vol. 17 Issue 2, p133
Academic Journal
We propose a new methodology to include hedge funds in a traditional portfolio. The concept of 'substitution' consists of activating a passive traditional investment strategy in a given asset class by adding active hedge fund strategies focusing on the same asset class. Our analysis, based on long-term data, shows that activated asset classes outperform the passive investments in terms of total performance, risk-adjusted performance and downside protection. Aggregating activated asset classes into an overall portfolio improves the efficiency of the initial portfolio without deteriorating its fat tail risk. Finally, we show that the 'substitution' approach leads to similar results as an optimisation approach in which the hedge fund portfolio is optimised as a stand-alone investment class and then added to the traditional portfolio. These findings validate an alternative solution for institutions that want to invest in hedge fund strategies, a solution that may be closer to their approach of portfolio management.


Related Articles

  • Performance of Canadian hedge funds using a modified Sharpe ratio. Gregoriou, Greg N. // Derivatives Use, Trading & Regulation;2004, Vol. 10 Issue 2, p149 

    Many institutional investors use the traditional Sharpe ratio today to examine the risk-adjusted performance of Canadian hedge funds. This could pose problems, however, owing to the non-normal returns of this alternative asset class. A modified value-at-risk (VaR) and modified Sharpe ratio solve...

  • Hedge funds: Ten years of private client investing — is it still time to invest? Botteron, Pascal // Derivatives Use, Trading & Regulation;2007, Vol. 12 Issue 4, p301 

    This article examines and addresses the arguments presented against the hedge fund industry in past years. We try to identify the source of each argument and verify whether these arguments are still valid. We find that a majority of these arguments are largely unfounded, although some still...

  • The Blob Attacks Investment Manager Due Diligence: Invasion of the Perilous Peer Group Bias. Surz, Ronald J. // Journal of Financial Service Professionals;Jul2008, Vol. 62 Issue 4, p14 

    The article reports on one of the difficulties when it comes to evaluating fund managers and fund performance. Investment managers classify funds with regard to both market capitalization and their propensity for long term value or short-term growth. Discussed is the classification bias that...

  • Even Greater Role Seen for Alternatives in Mutual Funds. Lavine, Alan // Money Management Executive;10/22/2007, Vol. 15 Issue 40, p12 

    The article discusses the advancement of alternative investments in mutual funds in the U.S. The investments are recommended by mutual fund managers who believe they boost returns, compete with hedge funds and account for as much as 10 percent of assets. Managers suggest considering reverse...

  • WILL NEUTRAL VIEW HELP CLIENTS? Rinaldi, Ellen // On Wall Street;Jun2008, Vol. 18 Issue 6, p57 

    The article offers insights for fund managers on the benefits of market-neutral investing. It notes that market-neutral funds could offer low correlation to stocks and bonds, and potential returns more than that of cash. Market-neutral funds can be considered a class of hedge funds that operate...

  • COMING OF Age. Marton, Les; Smith, Nicola Ray // Canadian Investment Review;Fall2007, Vol. 20 Issue 3, p34 

    The article discusses the status of the hedge fund sector in Canada. The Canadian industry is now managing close to $30 billion across over 200 hedge funds. The size of the Canadian manager hedge fund industry (excluding fund of funds) is currently estimated at $9 billion, and roughly 70% of...

  • Chapter 7: Hedge Fund Performance.  // Foundations & Trends in Finance;2006, Vol. 2 Issue 2, p145 

    Chapter 7 of the book "Foundations and Trends� in Finance" is presented. It examines illiquid assets and its effects on hedge funds. Although hedge funds have been in business for over 60 years, growth in hedge fund assets and the significant attention devoted to hedge funds in the popular...

  • Two sides split on investment levels.  // Money Marketing;6/21/2007, p27 

    The article reports on the issues concerning the misunderstanding of advisers and providers on what level of diversification a client's portfolio should have to hedge funds in Great Britain. The report noted that some advisers at a round table meeting stated that five to ten percent is a fair...

  • Hedge funds: Structure vs. strategy. Collins, Daniel P. // Futures: News, Analysis & Strategies for Futures, Options & Deri;Apr2006, Vol. 35 Issue 5, p62 

    The article discusses strategies utilized by hedge funds. In reality, many hedge fund strategies are less risky than standard mutual funds. In 1949, Alfred Winslow Jones started the long position leveraging techniques. Jones sought to eliminate market bias by simultaneously buying undervalued...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics