What percentage of their portfolio should investors allocate to hedge funds? The only available answers to the above question are set in a static mean-variance framework, with no explicit accounting ...for uncertainty on the active manager's ability to generate abnormal return, and usually generate unreasonably high allocations to hedge funds. In this paper, we apply the model introduced in Cvitanic et al (2002b Working Paper USC) for optimal investment strategies in the presence of uncertain abnormal returns to a database of hedge funds. We find that the presence of the model risk significantly decreases an investor's optimal allocation to hedge funds. Another finding of this paper is that low beta hedge funds may serve as natural substitutes for a significant portion of investor risk-free asset holdings.
We generalize Markowitz analysis to the situations involving an uncertain exit time. Our approach preserves the form of the original problem in that an investor minimizes portfolio variance for a ...given level of the expected return. However, inputs are now given by the generalized expressions for mean and variance-covariance matrix involving moments of the random exit time in addition to the conditional moments of asset returns. Although efficient frontiers in the generalized and the standard Markowitz case may coincide under certain conditions, we demonstrate that, by means of an example, in general that is not true. In particular, portfolios efficient in the standard Markowitz sense can be inefficient in the generalized sense and vice versa. As a result, an investor facing an uncertain time horizon and investing as if her time of exit is certain would in general make suboptimal portfolio allocation decisions. Numerical simulations show that a significant efficiency loss can be induced by an improper use of standard mean-variance analysis when time horizon is uncertain.
Many investors do not know with certainty when their portfolio will be liquidated. Should their portfolio selection be influenced by the uncertainty of exit time? In order to answer this question, we ...consider a suitable extension of the familiar optimal investment problem of Merton Merton, R.C., 1971. Optimal consumption and portfolio rules in a continuous-time model. Journal of Economic Theory 3, 373–413, where we allow the conditional distribution function of an agent’s time-horizon to be stochastic and correlated to returns on risky securities. In contrast to existing literature, which has focused on an independent time-horizon, we show that the portfolio decision is affected.
Predictability in Hedge Fund Returns Amenc, Noël; El Bied, Sina; Martellini, Lionel
Financial analysts journal,
09/2003, Letnik:
59, Številka:
5
Journal Article
Recenzirano
A significant amount of research has been devoted to the predictability of traditional asset classes, but little is known about the predictability of returns emanating from alternative vehicles, such ...as hedge funds. We attempt to fill this gap by documenting evidence of predictability in hedge fund returns. Using multifactor models for the return on nine hedge fund indexes, for which the factors were chosen to measure the many dimensions of financial risk, we found strong evidence of significant predictability in hedge fund returns. We also found that the benefits of "tactical style allocation" portfolios are potentially large. We obtained even more spectacular results for an equity-oriented portfolio that mixed traditional and alternative investment vehicles and for a debt-oriented portfolio that mixed traditional and alternative investment vehicles. These results do not seem to have been significantly affected by the presence of reasonably high transaction costs.
This paper addresses the problem of pricing and hedging a random cash-flow received at a random date. In a general setup with a random time that is not a stopping time of the filtration generated by ...asset prices, we first provide an explicit characterization of the set of equivalent martingale measures. We also present price bounds consistent with perfect replication in the absence of arbitrage. As is often the case, such bounds are too wide to be of any practical use and we consider several choices for narrowing down to one the number of equivalent martingale measures.
Optimal active management fees Cvitanic, J.; Martellini, L.
Proceedings of the Winter Simulation Conference,
2002, Letnik:
2
Conference Proceeding
We consider the problem of a mutual fund manager that maximizes the present value of expected fees and has to decide the level of fee to impose on the fund. The fee will be paid by a risk averse ...investor that maximizes expected utility over final wealth. This investor can invest either in an indexed fund or in a managed fund. The manager has superior ability and, as a result of it, the fund offers a higher expected return. However, the investor has incomplete information about the ability of the fund manager. The investor has priors about this ability that are upgraded according to the performance of the fund. At some optimal level, the investor decides to switch from the market portfolio to the mutual fund. Our problem does not have a closed form solution, but we can compute optimal fees, using simulation.
Retrievable pathological specimens and clinical data on 70 patients with microinvasive carcinoma diagnosed on surgical specimens from cone biopsy or hysterectomy (Stage IA) were reviewed and compared ...to pertinent findings in the literature with the intent of evaluating diagnostic criteria and defining pathological features that may influence the outcome by therapy. Emphasis was given to the preoperative assessment emphasizing that both an accurate colposcopic evaluation and a detailed pathological analysis may reliably point to a conservative therapeutic approach. Increasing depth of stromal invasion was associated with lesion width as well as with endocervical extension, as measured on colposcopy, microcolpohisteroscopy, and histology. Lymph–vascular space involvement was significantly related to depth of invasion. Two patients of 28 with dissected nodes had node metastases as well as lymph–vascular space involvement. Both developed a pelvic recurrence. One had a >1- to ≤3-mm invasion depth, the other a >3- to ≤5-mm lesion invasion. While advocating a conservative procedure for Stage IA1, we suggest discrimination with regard to Stage IA2 because we believe that lymph–vascular involvement should be meticulously evaluated. In fact, >1- to ≤3-mm lesions without lymph–vascular space involvement can be conservatively treated, while for any other lesion falling within the Stage IA2 category a modified radical histerectomy plus pelvic lymphadenectomy should be recommended.
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