Information-ratio performance of fund-of-hedge-funds portfolio and tactical asset allocations : 1994-2006.

Abstract

Using style-level data, we analyze the return persistence and predictability in nine hedge fund styles and their fund-of-hedge-funds portfolios for the 1994-2006 period. For most (seven) hedge fund styles, the return persistence was detected while statistically significant return persistence for all hedge fund styles was found when the regression-based estimates of the Hurst exponents were used. We found that the information-ratios of the optimal Fund-of-Hedge-Fund portfolio ranged from 1.04 to 1.56 during the out-of-sample subperiods. The superior performance was robust to short-selling constraints and constrained active-return maximization algorithm. The superior out-of-sample performance of equity- and debt-oriented TAA portfolios indicated significant return-enhancing roles of the Fund-of-Hedge-Fund portfolios. These return-enhancing roles were not sensitive to considerations of alternative benchmark portfolios, short-selling constraints, and transaction costs.