Title: On investing in hedge funds: Optimal portfolios with regime-switching
Authors: Alfonso Valdesogo - THEMA, Universite de Cergy-Pontoise (France) [presenting]
Andreas Heinen - Universite de Cergy Pontoise (France)
Abstract: The joint effect of non-linearity and time variation in hedge fund returns on the benefit for an investor to include hedge funds into his optimal portfolio is analyzed. We model time variation with regime-switching and allow for an additional source of non-linearity with the use of copulas. We estimate a multivariate regime-switching copula model with one symmetric Gaussian dependence regime and with a possibly asymmetric canonical vine regime that allows for tail dependence. We compute the gains for an active investor with CRRA utility, who considers different asset classes, from investing in any one of a number of hedge fund strategies. The asset classes we consider are U.S. stocks, a global bond index, and commodities. We observe that the gains are not homogeneous amongst the difference hedge funds strategies.