Diversification and Yield Enhancement with Hedge Funds

Abstract

In this article, the diversification effects from introducing hedge funds into a traditional portfolio of stocks and bonds are studied. The authors find that although the inclusion of hedge funds may significantly improve a portfolio's mean-variance characteristics, it can also be expected to lead to significantly lower skewness and higher kurtosis. This means that the case for hedge funds is less straightforward than often suggested and includes a definite trade-off between profit and loss potential.