Importance of Tactical Strategy Allocation on
Fund-of-Hedge-Funds Allocations

Abstract

The importance of strategic allocation for traditional asset classes has been widely accepted. However, its importance in hedge fund allocation is still a matter of debate and draws interest both from academics and those in the industry, in particular, funds of hedge funds. In the present study, an attempt to highlight the importance of tactical strategy allocation in fund-of-hedge-funds allocation is presented. For this purpose, comparisons of the historical performance of various hedge fund trading strategies over various time periods have been performed. It has been shown that the performance of the hedge fund strategies (across various time periods chosen in the present study) can be best described by a univariate skewed t-distribution. Comparisons of the cumulative distribution function of the various trading strategies show significant differences in their probability of delivering absolute returns, hence emphasizing the significance of tactical strategic allocation. Furthermore, it has been shown that these probabilities vary vastly across time periods, thus requiring active fund management.