Extending Black-Litterman Analysis Beyond the Mean-Variance Framework

Abstract

Extension of the Black-Litterman Bayesian approach to portfolio construction in the presence of non-trivial preferences about higher moments of asset return distributions has a particular application to active style allocation decisions in hedge fund investing. Results here suggest that the systematic implementation of active style allocation decisions can add significant value in a hedge fund portfolio, provided implementation of a sound investment process to account for non-normality and parameter uncertainty in hedge fund return distributions.