Portfolios of Hedge Funds What Investors Really Invest In

Using monthly return data over the period June 1994 – May 2001 we investigate the performance of randomly selected baskets of hedge funds ranging in size from 1 to 20 funds. The analysis shows that increasing the number of funds can be expected to lead not only to a lower standard deviation but also, and less attractive, to lower skewness and increased correlation with the stock market. Most of the change occurs for relatively small portfolios. Holding more than 15 funds changes little. The population average appears to be a good approximation for the average basket of 15 or more funds. With 15 funds, however, there is still a substantial degree of variation in performance between baskets, which dissolves only slowly when the number of funds is increased. Survivorship bias is largely independent of portfolio size and thus cannot be diversified away. Finally, our efficiency test indicates that one only needs to combine a small number of funds to obtain a substantially more efficient risk-return profile than that offered by the average individual hedge fund.

Who Should Buy Hedge Funds? The effect of including Hedge Funds in Portfolios of Stocks and Bonds

Using monthly return data on 455 hedge funds over the period 1994-2001 we study the diversification effects from introducing hedge funds into a traditional portfolio of stocks and bonds. Our results indicate that although the inclusion of hedge funds may significantly improve a portfolio’s mean-variance characteristics, it can also be expected to lead to significantly lower skewness as well as higher kurtosis. This means that the case for hedge funds includes a definite trade-off between profit and loss potential and suggests that, contrary to popular belief, hedge funds might be more suitable for institutional than for private investors. Our results also emphasize the fact that to have at least some impact on the overall portfolio, one has to make an allocation to hedge funds which exceeds the typical 1-3% that many institutions are currently considering.

Stocks, Bond and Hedge Funds: Not a Free Lunch

We study the diversification effects from introducing hedge funds into a traditional portfolio of stocks and bonds. Our results make it clear that in terms of skewness and kurtosis equity and hedge funds do not combine very well. Although the inclusion of hedge funds may significantly improve a portfolio’s mean-variance characteristics, it can also be expected to lead to significantly lower skewness as well as higher kurtosis. This means that the case for hedge funds includes a definite trade-off between profit and loss potential. Our results also emphasize that to have at least some impact on the overall portfolio, investors will have to make an allocation to hedge funds which by far exceeds the typical 1-5% that many institutions are currently considering.

Looking for bSM physics using top-quark polarization and decay-lepton kinematic asymmetries

We explore beyond Standard Model (bSM) physics signatures in the $l+jets$ channel of $t\overline{t}$ pair production process at the Tevatron and the LHC. We study the effects of bSM physics scenarios on the top quark polarization and on the kinematics of the decay leptons. To this end, we construct asymmetries using the lepton energy and angular distributions. Further, we find their correlations with the top polarization, net charge asymmetry and top forward backward asymmetry. We show that used together, these observables can help discriminate effectively between SM and different bSM scenarios which can lead to varying degrees of top polarization at the Tevatron as well as the LHC. We use two types of coloured mediator models to demonstrate the effectiveness of proposed observables, an $s$-channel axigluon and a $u$-channel diquark.Comment: 39 pages, 10 figures and 4 tables. To appear in Phys. Rev.