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.
TOPICS: Real assets/alternative investments/private equity, risk management, performance measurement, portfolio construction
- © 2008 Pageant Media Ltd
Don’t have access? Click here to request a demo
Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600
Log in using your username and password
In this issue
