Are There Benefits from Dynamic Asset Allocation Strategies Across Hedge Funds?

Abstract

The performance of various asset allocation strategies across hedge fund indices is compared using both static and dynamic methods based on forecasts of conditional volatility. Daily rebalanced dynamic portfolios are examined for the three main subindices of Standard & Poor’s Hedge Fund Index. Out-of-sample results are also reported for nine Credit Suisse First Boston/Tremont hedge fund indices. Time-varying volatility and volatility clustering characterizes most hedge fund indices. Using forecasts of next-period volatility based on a time-varying procedure generally improves the risk–return profile of the portfolio. All of the dynamic hedge fund index portfolios largely outperform the passive S&P 500 Index, both on an expected return and risk-adjusted return basis.