Does Bitcoin Add to Risk Diversification of Alternative Investment Fund Portfolio?

Abstract

Venture capital investment and hedge fund investment are two asset classes of alternative investment fund portfolios. The purpose of this study was to determine whether the digital currency named bitcoin truly adds to diversification in an alternative investment fund portfolio. Vector auto regression was used to determine any unidirectional or bidirectional relationship between variables. The DCC-GARCH test was conducted to determine any conditional correlations that impact volatility transmission over a shorter and longer duration of time between variables. The results showed that there was no unidirectional or bidirectional relationship between bitcoin and FTSE venture capital index, as well as between bitcoin and the Barclays Hedge Fund Index. The DCC model showed no volatility transmission between bitcoin and the Barclays Hedge Fund Index, whereas volatility persists between bitcoin and the FTSE Venture Capital Index, connecting risk between the financial time series with only low correlations. These findings suggest that bitcoin could be used by investors, policy makers, and hedgers for diversification in alternative investment fund portfolios.