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Activity Number:
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415
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Type:
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Contributed
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Date/Time:
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Wednesday, August 6, 2003 : 2:00 PM to 3:50 PM
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Sponsor:
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Business & Economics Statistics Section
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| Abstract - #301591 |
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Title:
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The Statistics of Portfolio Sharpe Ratio for Fund of Hedge Funds
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Author(s):
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Youngju Lee*+ and Bernard Lee
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Companies:
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Allianz Hedge Fund Partners and Allianz Hedge Fund Partners
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Address:
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Four Embarcadero Center, 32nd Flr, San Francisco, CA, 94111,
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Keywords:
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hedge funds ; Sharpe ratio ; fund of funds ; asymptotics
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Abstract:
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This paper is motivated by the empirical observation that the optimized ex-ante Sharpe ratios of fund-of-fund (FOF) portfolios often have values reaching 4 or higher, while its ex-post counterpart is more likely to be in the range of 1 to 2. This clearly suggests an estimation problem. To resolve this discrepancy, the authors have expanded on the research by Lo (2002) to compute the asymptotic estimator of the variance of the Sharpe ratio of an FOF portfolio. We have delived a crude estimation formulae for cases of both independent returns and dependent returns among the underlying hedge funds. The authors' goal is to incorporate such error analysis when optimizing FOF portfolios in order to derive an optimal solution that mazimize a minimuim estimator of FOF portfolio Sharpe ratio, at a specified level of confidence. Based on empirical studies, the authors found that the Sharpe Ratio is more powerful in explaining investment performance for FOF portfolios than for single hedge funds. Most of the diversification benefits of FOF investing can be reached by adding 10 to 40 hedge funds to an FOF portfolio. More important, overdiversification can remove idiosyncratic characteristics.
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