Do Hedge Funds Belong in Taxable Portfolios?
- Topics:
- Commercial Lending
- Tags:
- AIMR,
- Finance,
- Financial Services,
- Hedge Fund,
- Investment
- Source:
- AIMR
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Overview: The authors identify the portfolio weights that provide maximum expected returns for various risk levels to determine whether hedge funds should be included in taxable portfolios. The results indicate that a significant percentage of hedge funds should be included, displacing municipal bonds. A number of studies have demonstrated that hedge funds can improve portfolio performance for tax-free investors. The authors ask whether including hedge funds in taxable portfolios improves their performance. The authors present historical returns, standard deviations, and correlations of returns for various asset classes during the 1990s. For purposes of estimating portfolio returns, however, they rely on historical results for correlations only. The authors demonstrate that even though most of the returns on hedge funds are taxed as ordinary income, a significant percentage of taxable portfolios should be placed in hedge funds. The optimal allocation to hedge funds depends on the investor’s return expectations, risk tolerance, and time horizon.
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Format: PDF | Size: 48KB | Date: Feb 2002 | Pages: 2
