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Financial Markets and Portfolio Management

, Volume 21, Issue 4, pp 425–444 | Cite as

The tactical and strategic value of hedge fund strategies: a cointegration approach

  • Roland FüssEmail author
  • Dieter G. Kaiser
Article

Abstract

This paper analyzes long-term comovements between hedge fund strategies and traditional asset classes using multivariate cointegration methodology. Since cointegrated assets are tied together over the long run, a portfolio consisting of these assets will have lower long-term volatility. Thus, if the presence of cointegration lowers uncertainty, risk-averse investors should prefer assets that are cointegrated. Long-term (passive) investors can benefit from the knowledge of cointegrating relationships, while the built-in error correction mechanism allows active asset managers to anticipate short-run price movements. The empirical results indicate there is a long-run relationship between specific hedge fund strategies and traditional financial assets. Thus, the benefits of different hedge fund strategies are much less than suggested by correlation analysis and portfolio optimization. However, certain strategies combined with specific stock market segments offer portfolio managers adequate diversification potential, especially in the framework of tactical asset allocation.

Keywords

Hedge fund strategies Stock markets Tactical and strategic asset allocation Portfolio optimization Multivariate cointegration analysis Johansen test 

JEL

C32 G11 G15 

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Copyright information

© Swiss Society for Financial Market Research 2007

Authors and Affiliations

  1. 1.Department of Empirical Research and EconometricsUniversity of FreiburgFreiburg im BreisgauGermany
  2. 2.Feri Institutional Advisors GmbHBad HomburgGermany

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