What percentage of their portfolio should investors allocate to alternative investment vehicles? The only available answers to the above question are set in a static meanvariance framework, with no explicit accounting for uncertainty on the active manager’s ability to generate abnormal return. In this paper we consider the problem of an investor who can choose between the riskfree security and ...

The returns to hedge funds and other alternative investments are often highly serially correlated. In this paper, we explore several sources of such serial correlation and show that the most likely explanation is illiquidity exposure and smoothed returns. We propose an econometric model of return smoothing and develop estimators for the smoothing profile as well as a smoothing-adjusted Sharpe r...

This chapter focuses on institutional investors in the German financial markets. Institutional investors are specialized financial intermediaries who collect and manage funds on behalf of small investors toward specific objectives in terms of risk, return and maturity. The major types of institutional investors in Germany are insurance companies and investment funds. We will examine the nature ...

Selected hedge funds employ trend-following strategies in an attempt to achieve superior risk adjusted returns. We employ a lookback straddle approach for evaluating the return characteristics of a trend following strategy. The strategies can improve investor performance in the context of a multi-period dynamic portfolio model. The gains are achieved by taking advantage of the funds’ high level...

In this paper we propose a copula-based technique to recover the distribution of actively managed funds. The copula is meant to represent the dependence structure between the market return (or in general the benchmark) and the investment strategy of the asset manager. The analysis is carried out in a rational investor economy with managed funds, such as that in Merton (1981) and Berk and Green ...

We use a new dataset of hedge fund returns from a separate account platform to examine (1) how much of hedge fund return smoothing is due to main-fund specific factors, such as managerial reporting discretion (2) the costs of removing hedge fund share restrictions. These accounts trade pari passu with matching hedge funds but feature third-party reporting and permissive share restrictions. We u...

We reveal pitfalls in the hedging of insurance contracts with a minimum return guarantee on the underlying investment, e.g. an external mutual fund. We analyze basis risk entailed by hedging the guarantee with a dynamic portfolio of proxy assets for the funds. We also take account of liquidity risk which arises since the insurer may need to advance funds for performing the hedge. Based on a lea...

Previous papers find no relationship between interest rates and the discounts of US closed-end funds before 1985. This is taken as evidence against management fees being a cause of discounts because a negative relationship is expected: if interest rates rise, you would expect to see discounts fall as the present value of future fees is reduced. But from 1985 forward, there has been a strong pos...