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The Journal of Alternative Investments

The Journal of Alternative Investments

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Primary Article

The Impact of Non-normality Risks and Tactical Trading on Hedge Fund Alphas

Harry M. Kat and Joëlle Miffre
The Journal of Alternative Investments Spring 2008, 10 (4) 8-21; DOI: https://doi.org/10.3905/jai.2008.705529
Harry M. Kat
A professor of risk management at Cass Business School, City University in London, U.K.
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  • For correspondence: h.kat@city.ac.uk
Joëlle Miffre
An associate professor of finance at EDHEC Business School in Nice, France.
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  • For correspondence: joelle.miffre@edhec.edu
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Abstract

In recent years, hedge funds have become very popular, with institutional investors. This article contributes to the debate on hedge fund performance by quantifying the omission non-normality risks and tactical trading when evaluating hedge fund returns. This is done by evaluating hedge fund performance using a model that treats systematic non-normality risks as a potential source of hedge fund returns. In addition, the tactical asset allocation decisions of fund managers are explicitly modeled. The results show that the arrival of public information alters the asset allocation of hedge fund managers and induces a change in the risk profile and performance of hedge funds. Further they indicate that failure to account for these two features leads to incorrect statistical inference on the performance of 1 out of 4 hedge funds and overstates alpha estimates. Overall, non-normality risks and tactical asset allocation explain no less than 23.1% of the commonly perceived abnormal performance of hedge funds.

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The Journal of Alternative Investments
Vol. 10, Issue 4
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The Impact of Non-normality Risks and Tactical Trading on Hedge Fund Alphas
Harry M. Kat, Joëlle Miffre
The Journal of Alternative Investments Mar 2008, 10 (4) 8-21; DOI: 10.3905/jai.2008.705529

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The Impact of Non-normality Risks and Tactical Trading on Hedge Fund Alphas
Harry M. Kat, Joëlle Miffre
The Journal of Alternative Investments Mar 2008, 10 (4) 8-21; DOI: 10.3905/jai.2008.705529
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