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Fixed-Income Portfolio Allocation Including Hedge Fund Strategies: A Copula Opinion Pooling Approach

Michael Stein, Roland Füss and Wolfgang Drobetz
The Journal of Fixed Income Spring 2009, 18 (4) 78-91; DOI: https://doi.org/10.3905/JFI.2009.18.4.078
Michael Stein
is a doctoral candidate at the department of econometrics, statistics and mathematical finance at the University of Karlsruhe and Karlsruhe Institute of Technology (KIT) in Karlsruhe and a member of the Real Estate Strategy and Portfolio Solutions group at Credit Suisse Asset Management in Frankfurt, Germany.
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  • For correspondence: michael.stein@statistik.unikarlsruhe.de
Roland Füss
is a professor of finance at the European Business School, International University in Oestrich-Winkel, Germany.
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  • For correspondence: roland.fuess@ebs.edu
Wolfgang Drobetz
is a professor of finance at the Institute of Finance, University of Hamburg in Hamburg, Germany.
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  • For correspondence: wolfgang.drobetz@wiso.unihamburg.de
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Abstract

This paper adapts Meucci's [2006a, 2006b] copula opinion pooling (COP) framework to examine whether fixed income hedge fund strategies enhance the risk-return spectrum of traditional bond portfolios. In contrast to the Black-Litterman setup, the COP approach does not rely on linear dependencies, and avoids the problems associated with the assumption of normally distributed asset returns. We analyze three scenarios that represent investor expectations about the performance of fixed income portfolios, and we add fixed income hedge fund strategies such as fixed income arbitrage, convertible bond arbitrage, and distressed securities, given expected shortfall constraints. Our results suggest that investor market expectations and attitudes toward potential losses are both important in determining the relative weight of hedge funds in the optimal portfolio. Depending on the model parameters, the allocation to hedge funds can vary greatly, from 0% to 85%.

TOPICS: Fixed-income portfolio management, portfolio theory, simulations

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The Journal of Fixed Income
Vol. 18, Issue 4
Spring 2009
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Fixed-Income Portfolio Allocation Including Hedge Fund Strategies: A Copula Opinion Pooling Approach
Michael Stein, Roland Füss, Wolfgang Drobetz
The Journal of Fixed Income Mar 2009, 18 (4) 78-91; DOI: 10.3905/JFI.2009.18.4.078

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Fixed-Income Portfolio Allocation Including Hedge Fund Strategies: A Copula Opinion Pooling Approach
Michael Stein, Roland Füss, Wolfgang Drobetz
The Journal of Fixed Income Mar 2009, 18 (4) 78-91; DOI: 10.3905/JFI.2009.18.4.078
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  • Article
    • Abstract
    • ASSET ALLOCATION AND INVESTOR VIEWS
    • THE COPULA OPINION POOLING APPROACH
    • CHARACTERISTICS OF FIXED-INCOME HEDGE FUND STRATEGIES
    • PORTFOLIO ALLOCATION USING THE COPULA OPINION POOLING APPROACH
    • CONCLUSION AND OUTLOOK
    • ENDNOTES
    • REFERENCES
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