We investigate the benefits for a constant relative risk aversion investor of including different hedge fund styles into an optimal portfolio of stocks, bonds and commodities. We use a multivariate canonical vine copula regime-switching model which allows for non-linearity, asymmetry and time variation in hedge fund returns. We find that (i) investors with a five year horizon are willing to pay about 4 cents per dollar to gain access to hedge funds; (ii) risk-averse investors are willing to pay more to gain access to hedge fund investment, even though they end up holding less, compared to more risk- tolerant investors; (iii) for risk-averse investors, hedge funds play the role of the risky asset, whereas for more risk-tolerant investors, they play the role of the safe asset; (iv) optimally investing in hedge funds increases historical returns only until the subprime crisis, but produces diversification gains in the form of lower volatility even after.
Comissão Organizadora
Anderson Odias da Silva
Claudia Yoshinaga
Ricardo D. Brito
Felipe Saraiva Iachan
Vinicius Augusto Brunassi Silva
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