Hedge Funds In Portfolios of Risk-Averse Investors

Document Type

Article

Publication Date

1-1-2007

School

Finance

Abstract

We find that adding a hedge fund to an optimally weighted portfolio of stocks and T-bills generally increases the utility of an investor. From a sample of hedge funds with returns from 1996 to 2005, the certainty equivalent was an average of five basis points (monthly) higher with a ten percent allocation into a hedge fund. Funds from different style categories require different allocations into the stock market, but nearly all funds improved performance. Contrary to popular opinion, we find that highly risk-averse investors gain even more than less risk-averse investors by adding a hedge fund into their portfolio.

Publication Title

Journal of Economics and Finance

Volume

31

Issue

2

First Page

219

Last Page

233

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