A Multi-Criteria Portfolio Analysis of Hedge Fund Strategies

Thumbnail Image
Official URL
Full text at PDC
Publication Date
Advisors (or tutors)
Journal Title
Journal ISSN
Volume Title
Facultad de Ciencias Económicas y Empresariales. Instituto Complutense de Análisis Económico (ICAE)
Google Scholar
Research Projects
Organizational Units
Journal Issue
This paper features a tri-criteria analysis of Eurekahedge fund data strategy index data. We use nine Eurekahedge equally weighted main strategy indices for the portfolio analysis. The tri-criteria analysis features three objectives: return, risk and dispersion of risk objectives in a Multi-Criteria Optimisation (MCO) portfolio analysis. We vary the MCO return and risk targets and contrast the results with four more standard portfolio optimisation criteria, namely the tangency portfolio (MSR), the most diversi_ed portfolio (MDP), the global minimum variance portfolio (GMW), and portfolios based on minimising expected shortfall (ERC). Backtests of the chosen portfolios for this hedge fund data set indicate that the use of MCO is accompanied by uncertainty about the a priori choice of optimal parameter settings for the decision criteria. The empirical results do not appear to outperform more standard bi-criteria portfolio analyses in the backtests undertaken on our hedge fund index data.
Unesco subjects
Allen, D.E., M. McAleer, R, Powell, and A.K. Singh (2016), Down-side risk metrics as portfolio diversi_cation strategies across the global _nancial crisis, Journal of Risk and Financial Management, 9(2), 6; Doi:10.3390/jrfm9020006. Bali, T.G., S.J. Brown., and K.O. Dermitas (2013), Do hedge funds outperform stocks and bonds?, Management Science, 59 (8), 1887-1903. Barry, C.B. (1974), Portfolio analysis under uncertain means, variances, and covariances, Journal of Finance 29, 515_522. Bawa, V. S., Brown, S., and R. Klein (1979), Estimation Risk and Optimal Portfolio Choice, North Holland, Amsterdam. Boudt, K., B. Peterson, and C. Croux (2008), Estimation and decomposition of downside risk for portfolios with non-normal returns, Journal of Risk, 11,2, 79-103. Choueifaty,Y., and Y. Coignard (2008), Toward maximum diversification, Journal of Portfolio Management, 34 (4), 40-51. Choueifaty,Y., T. Froidure, and J. Reynier (2013), Properties of the most diversifed portfolio, Journal of Investment Strategies, 2, 1-22. Deb, K. (2001), Multi-Objective Optimization using Evolutionary Algorithms, UK, Wiley. Deb, K. (2011), Multi-objective evolutionary optimisation for product design and manufacturing, Chapter in Multi-Objective Optimization Using Evolutionary Algorithms: An Introduction, New York, Springer, pp. 3-34. Deb, K., R. Steuer, R. Tewari, and R. Tewari (2011), On the Effectiveness of a NSGA-II Local Search Approach Customized for Portfolio Optimization, KanGAL Report 2011007, Indian Institute of Technology Kanpur, Kanpur, India. DeMiguel, V., L. Garlappi, and R. Uppal (2009), Optimal versus naive diversication: how inefficient is the 1/N portfolio diversification strategy?, Review of Financial Studies, 22, 1915_1953. O'Doherty, M.S., N.E. Savin, and A. Tiwari (2016) Evaluating hedge funds with pooled benchmarks, Management Science, 62 (1), 69-89. Hallerbach, W.G. and J. Spronk (2002), The relevance of MCDM for financial decisions, Journal of Multi-Criteria Decision Analysis, 11(4-5), 187-195. Jobson, J.D., R. Korkie, and V. Ratti (1979), Improved estimation for Markowitz portfolios using James-Stein type estimators, Proceedings of the American Statistical Association, 41, pp. 279_292. Jobson, J.D., and R. Korkie (1980), Estimation for Markowitz efficient portfolios, Journal of the American Statistical Association, 75, 544_554. Jorion, P. (1985), International portfolio diversification with estimation risk, Journal of Business, 58, 259_278. Markowitz, H.M. (1952), Portfolio selection, Journal of Finance, 7(1), 77_91. Markowitz, H.M. (1959), Portfolio Selection Efficient Diversification of Investments; Cowles Foundation, Wiley, New York. Michaud, R.O. (1989), The Markowitz optimization enigma: Is `optimized´ optimal? Financial Analysts Journal, 45, 31_42. Pfaff, B. (2016), R/Finance 2016: Applied Finance with R, May 2016, Chicago, IL, USA, Talk: Portfolio Selection with Multiple Criteria, available at: Qi, Y., R.E. Steuer, and M. Wimmer (2015), An analytical derivation of the efficient surface in portfolio selection with three criteria, Annals of Operations Research, doi:10.1007/s10479-015-1900-y. Rockafellar, R.T., S. Uryasev, and M. Zabarankin (2006), Master funds in portfolio analysis with general deviation measures, Journal of Banking and Finance, 30, 743_776. Rockafellar, R.T., S. Uryasev, and M. Zabarankin (2007a), Optimality conditions in portfolio analysis with general deviation measures, Mathematical Programming, 108, 515_540. Rockafellar, R.T., S. Uryasev, and M. Zabarankin (2007b), Equilibrium with investors using a diversity of deviation measures, Journal of Banking and Finance, 31, 3251_3268. Roy, A.D. (1952), Safety first and the holding of assets, Econometrica, 3, 431_449. Streichert, F., H. Ulmer, and A. Zell (2003), Evolutionary algorithms and the cardinality constrained portfolio optimization problem, in Selected Papers of the International Conference on Operations Research, Springer-Verlag, Berlin, pp. 253-260. Steuer, R., Y. Qi, and M. Hirschberger (2005), Multiple objectives in portfolio selection, Journal of Financial Decision Making, 1DOI: 10.1007/s10479-015-1900-y. Steuer, R., Y. Qi, and M. Hirschberger (2007), Suitable-portfolio investors, nondominated frontier sensitivity, and the effect of multiple objectives on standard portfolio selection, Annals of Operations Research, 152(1), 297_317. Steuer, R., M. Wimmer, and M. Hirschberger (2013), Overviewing the transition of Markowitz bi-criterion portfolio selection to tri-criterion portfolio selection, Journal of Business Economics, 83(1), 61_85. Utz, S., M. Wimmer, and R. Steuer (2015), Tri-criterion modeling for constructing more-sustainable mutual funds, European Journal of Operational Research, 246(1), 331_338. Wallenius, J., J.S. Dyer, P.C. Fishburn, R.E. Steur, S. Zints, and K. Deb (2008), Multiple criteria decison making, multiattribute utility theory: Recent accomplishments and what lies ahead, Management Science, 54, 1336-1349. Zabarankin, M., K. Pavlikov, S. Uryasev (2014), Capital asset pricing model (CAPM) with draw-down measure, European Journal of Operational Research, 234, 508_517.