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Article

The Impact of Illiquidity and Higher Moments of
Hedge Fund Returns on Their Risk-Adjusted
Performance and Diversification Potential

Laurent Cavenaile, Alain Coën and Georges Hübner
The Journal of Alternative Investments Spring 2011, 13 (4) 9-29; DOI: https://doi.org/10.3905/jai.2011.13.4.009
Laurent Cavenaile
is a research associate for the KBL Chair of Fund Industry at the HEC Management School in the University of Lège, Belgium.
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  • For correspondence: laurent.cavenaile@ulg.ac.be
Alain Coën
is a professor at the Graduate School of Business at the University of Quebec and an associate research fellow at CIRPÉE, in Montreal, Canada.
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  • For correspondence: coen.alain@uqam.ca
Georges Hübner
holds the Deloitte Chair of Portfolio Management and Performance at the HEC Management School at the University of Liège, Belgium, and is an associate professor of finance at the School of Business and Economics at Maastricht University in Maastricht, The Netherlands, CSO at Gambit Financial Solutions in Belgium, and an affiliate professor of finance at EDHEC, in France.
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  • For correspondence: g.hubner@ulg.ac.be
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Abstract

This article studies the joint impact of smoothing and fat tails on the risk–return properties of hedge fund strategies. First, the authors adjust risk and performance measures for illiquidity and the non-Gaussian distribution of hedge funds returns. They use two risk metrics: the Modified Value-at-Risk and a preference-based measure retrieved from the linear exponential utility function. Second, they revisit the hedge fund diversification effect with these adjustments for illiquidity. Their results report similar fund performance rankings and optimal hedge fund strategy allocations for both adjusted metrics. They also show that the benefits of hedge funds in portfolio diversification persist but tend to weaken after adjustments for illiquidity are made.

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The Journal of Alternative Investments: 13 (4)
The Journal of Alternative Investments
Vol. 13, Issue 4
Spring 2011
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The Impact of Illiquidity and Higher Moments of
Hedge Fund Returns on Their Risk-Adjusted
Performance and Diversification Potential
Laurent Cavenaile, Alain Coën, Georges Hübner
The Journal of Alternative Investments Mar 2011, 13 (4) 9-29; DOI: 10.3905/jai.2011.13.4.009

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The Impact of Illiquidity and Higher Moments of
Hedge Fund Returns on Their Risk-Adjusted
Performance and Diversification Potential
Laurent Cavenaile, Alain Coën, Georges Hübner
The Journal of Alternative Investments Mar 2011, 13 (4) 9-29; DOI: 10.3905/jai.2011.13.4.009
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  • Article
    • Abstract
    • THEORETICAL FRAMEWORK: ADJUSTING RISK AND PERFORMANCE MEASURES FOR ILLIQUIDITY
    • DATA AND ADJUSTED RETURN SERIES
    • ANALYSIS OF PERFORMANCE MEASURES AND OPTIMAL PORTFOLIOS
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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