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Essays in investment strategies

Jimmy Kyung-Soo Liew, 1999
Faculty Advisor: Franklin R. Edwards
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This thesis consists of two studies in investment strategies. The first study examines the performance of hedge funds and managed futures as alternative asset classes. Hedge fund and managed futures investments are attractive both as stand-alone investments and performance-enhancing portfolio assets. We find that including these investments in diversified portfolio of stocks and bonds typically increases the Sharpe ratios of the original portfolio between 22.7 and 45.4 percent. Moreover, we find that hedge funds and managed futures are complementary asset classes; the fundamental source of their returns differs. Hedge funds have exposure to dynamically constructed long-short equity strategies, and managed futures have exposure to similar long-short strategies in the commodity futures markets. Finally, an analysis of performance persistence suggests that some hedge fund managers possess superior fund-management skills.

The second study analyzes zero-investment international equity strategies. International evidence exists for the predictability of the cross-section of expected stock returns. Company specific information such as book-to-market, market capitalization, and past returns have been documented to predict equity returns in many countries. This study provides time-series evidence that the book-to-market and size return-based factors predict future economic growth even after we control for predictability due to the market. In addition, evidence indicates that the size factor predicts cross-sectional differences in country real growth. Limited evidence exists that links country momentum to future real growth.

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