Title: Optimal portfolio allocation with Asian Hedge Funds and Asian REITs

Authors: Stephan Hocht, Kah Hwa Ng, Jurgen Wolf, Rudi Zagst

Addresses: HVB-Institute for Mathematical Finance, Technische Universitat Munchen, Germany. ' Risk Management Institute, National University of Singapore, Singapore. ' Technische Universitat Munchen, Germany. ' HVB-Institute for Mathematical Finance, Technische Universitat Munchen, Germany

Abstract: During the past years, the institutional interest in investments into hedge funds and Real Estate Investment Trusts (REITs) has grown considerably. In this paper, the benefits of investing in these asset classes are analysed by applying models that recognise higher-order moments or the whole return distribution like the power-utility, Omega- and Score-value model. Trying to obtain more general results than those we can find from historical data only, we modelled the asset returns by Markov switching processes and did a Monte Carlo study. Within this design, we analysed the optimal allocations to hedge funds and REITs statically and with monthly reallocations based on data from Asian markets. Our main findings are that in the static case the utility model and the Score model are dominant, whereas the mean-variance model appears to be the model of the first choice in the dynamic case. In both settings, hedge funds are the most dominant asset of the optimal portfolios. REITs are mainly used for diversification and added at comparably lower rates.

Keywords: alternative investments; asset allocation; higher-order moments; Markov switching autoregressive model; portfolio allocation; Asian hedge funds; real estate investment trusts; Asian REITs; Monte Carlo simulation.

DOI: 10.1504/IJSSCI.2008.017588

International Journal of Services Sciences, 2008 Vol.1 No.1, pp.36 - 68

Published online: 18 Mar 2008 *

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