Journal of Banking & Finance Vol. 31 No. 1 2007
Hedge fund portfolio construction: A comparison of static and dynamic approaches
Abstract
This article studies the impact of modeling time-varying covariances/correlations of hedge fund returns in terms of hedge fund portfolio construction and risk measurement. We use a variety of static and dynamic covariance/correlation prediction models and compare the optimized portfolios’ out-of-sample performance. We find that dynamic covariance/correlation models construct portfolios with lower risk and higher out-of-sample risk-adjusted realized return. The tail-risk of the constructed portfolios is also lower. Using a mean-conditional-value-at-risk framework we show that dynamic covariance/correlation models are also successful in constructing portfolios with minimum tail-risk.
- DOI
- 10.1016/j.jbankfin.2006.01.002
- Volume
- 31
- Issue
- 1
- Pages
- 199-217
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref