Types of Hedge Fund Investors

the stock strategy does not defer the taxable gain at all. Equation (3.3)
shows the after-tax return for an individual with a stock portfolio compris-
ing 90 percent of the investment assets and a hedge fund with the remain-
ing 10 percent of the assets.
In this scenario, the hedge fund return lowers the aggregate after-tax return
because the higher tax rate on the hedge fund's pretax return lowers the af-
ter-tax return below the stock after-tax return.
Assume that the stocks and the hedge fund in the preceding example
have standard deviation of return (also called volatility) of 20 percent
annualized. However, the returns have a correlation of only 25 percent.
Relying on the formula for portfolio volatility presented in answer 2.13,
the standard deviation of return on the portfolio is given by equation
(3.4):
(3.4)
where A = Standard deviation on stock portfolio = 20%

B = Standard deviation on hedge fund = 20%

A,B = Correlation between the stock portfolio and the hedge fund
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HEDGE FUND COURSE
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