The purpose of this paper is to examine the ability of hedge funds and funds of hedge funds to generate absolute returns using fund level data.
The absolute return profiles are identified using properties of the empirical distributions of fund returns. The authors use both Bayesian multinomial probit and frequentist multinomial logit regressions to examine the relationship between the return profiles and fund characteristics.
Some evidence is found that only some hedge funds strategies, but not all of them, demonstrate higher tendency to produce absolute returns. Also identified are some investment provisions and fund characteristics that can influence the chance of generating absolute returns. Finally, no evidence was found for performance persistence in terms of absolute returns for hedge funds but some limited evidence for funds of funds.
This paper is the first attempt to examine the hedge fund return profiles based on the notion of absolute return in great details. Investors and managers of funds of funds can utilize the identification method in this paper to evaluate the performance of their interested hedge funds from a new angle.
Using the properties of the empirical distribution of the hedge fund returns to classify them into different absolute return profiles is the unique contribution of this paper. The application of the multinomial probit and multinomial logit models in the fund performance and fund characteristics literature is also new since the dependent variable in the authors' regressions is multinomial.
The purpose of this paper is to examine the effects of parameter uncertainty in the returns process with regime shifts on optimal portfolio choice over the long run for a…
The purpose of this paper is to examine the effects of parameter uncertainty in the returns process with regime shifts on optimal portfolio choice over the long run for a static buy-and-hold investor who is investing in industry portfolios.
This paper uses a Markov switching model to model returns on industry portfolios and propose a Gibbs sampling approach to take into account parameter uncertainty. This paper compares the results with a linear benchmark model and estimates without taking into account parameter uncertainty. This paper also checks the predictive power of additional predictive variables.
Incorporating parameter uncertainty and taking into account the possible regime shifts in the returns process, this paper finds that such investors can allocate less in the long run to stocks. This holds true for both the NASDAQ portfolio and the individual high tech and manufacturing industry portfolios. Along with regime switching returns, this paper examines dividend yields and Treasury bill rates as potential predictor variables, and conclude that their predictive effect is minimal: the allocation to stocks in the long run is still generally smaller.
Studying the effect of regime switching behavior in returns on the optimal portfolio choice with parameter uncertainty is our main contribution.
Since the famous tapering talk of Bernanke, US Dollar (USD) made a significant appreciation on emerging market local currencies. When the stock indices are adjusted to…
Since the famous tapering talk of Bernanke, US Dollar (USD) made a significant appreciation on emerging market local currencies. When the stock indices are adjusted to USD, a negative relationship is usually the case. USD index is a natural candidate for measurement of these effects. It is seen that some emerging stock indices exhibit negative causality with USD index in Granger sense. Moreover, the authors take into account rolling correlations of USD index and the relevant stock indices and examine them on the investment horizon beginning from tapering talk. The authors deduce that Granger causality test and correlation results are coherent with each other which sheds light to the famous discussion whether causality implies correlation or vice versa.