THE JOURNAL OF ALTERNATIVE INVESTMENTS 9 I t is now well established that the construction of optimal hedge fund portfolios requires techniques that reach well beyond traditional mean variance analysis. For example, Brooks and Kat [2002] demonstrate that various hedge fund strategies have more downside than upside risk—returns exhibit negative skew and excess kurtosis. Lo [2001] and Anson [2002...

This paper finds that mean-variance portfolio optimization of stocks, bonds, hedge funds, real estate investment trusts and commodities is sufficiently exact to optimize the investor’s utility. We approximate the expected utility using a Taylor series expansion including terms involving third and fourth order moments. The empirial findings for monthly data from August 1994 August 2009 suggest t...

Optimal asset allocation strategies of defined-contribution pension plans for members whose terminal utility is a power function of wealth-to-wage ratio is investigated in this paper. The portfolio problem is to maximize the expected terminal utility in the presence of three risk sources, interest risk, asset risk and wage risk. A closed form solution is found for the asset allocation problem a...

a r t i c l e i n f o Keywords: Multivariate GARCH model Optimal hedge ratio Market noise conditional volatility This paper introduces a new incomplete index and establishes a new optimal hedging model. We find that when the market micro-noise is perfectly negatively correlated with the return of futures market, market incomplete-ness depends on the relative level of noise volatility. Especiall...

The focus of this article is to compare dynamic correlation models for the calculation of minimum variance hedge ratios between pairs of assets. Finding an optimal hedge requires not only knowledge of the variability of both assets, but also of the co-movement between the two assets. For this purpose, use is made of industry standard methods, like the naive hedging or the CAPM approach, more ad...