Qualified Korean Investors’Liquid Alternative Global Hedge Fund Investing under Autocorrelation Effects

Institutional investors’ asset allocation decisions to hedge fund strategies can be broadly classified as a combination of various risk/return goals with some idiosyncratic investment constraints. It is always a challenging question, such as whether the current asset allocation decision is within the scope of some common investment sentiment or not. Most hedge fund strategies are based on short volatility type of payoff structure since most have some exposures to large equity and credit risk premiums. Six different Barclays Hedge Fund sub-indices and two liquid alternative funds of hedge funds strategies developed by Simone Investment Managers are studied to find the better diversifier to Korean stock investors. In a multi-strategy based hedge fund indices, in which different trading strategies display varying degrees of autocorrelation, failure to correct for the bias of volatilities and correlations will lead to suboptimal portfolios in mean-variance perspective by excessive allocation to those “seemingly” low volatility buckets. Our empirical analysis provides some intuitive reasoning to explain the diversification benefits of some of the selected trend-following and various trading strategy hedge funds to Korean equity investors.