Improving the Optimization of a Hedge Fund portfolio in times of financial crisis

Abstract

The last two years have been characterized by geopolitical events and tensions which have caused anomalous fluctuations in the financial markets. The high uncertainty surrounding the global economic outlook has made investors risk-averse, focused mainly on preserving capital and neglecting the pursuit of high returns. Nonetheless, downturns resulting from a recession can represent advantageous and attractive entry points for rational and patient investors, who have a long-term horizon. The empirical analysis carried out in this study takes as a reference the latter type of private investor, who at the advent of the financial crisis caused by the Covid-19 pandemic decides to enter the market, countering the opposite signals from the environment. The aim of the thesis is to present what benefits the use of a rolling window can generate in contexts of high market volatility. In particular, a dynamic correlation model called DCC Garch will be used, in order to monitor performance and periodically rebalance the portfolio optimization. The hedge fund portfolio is used to carry out the analysis, which has historically had excellent returns during bearish periods.