Abstract
In this article, the use of the “mean-variance approach” for the determination of the benefits of allocations to hedge funds is critically evaluated. The advantages of investing in hedge funds are often explained and demonstrated with reference to a shift in the efficiency frontier of traditional portfolios. The added value of hedge funds is almost always indicated in a mean-standard deviation environment and should in our view be reconsidered. The estimated risk exposure can be quantified by the introduction of value-at-risk analysis corrected according to higher moments of distribution. With this new risk measure, we are able to obtain a corrected value.
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