TY - JOUR T1 - Hedge Fund Performance and Higher-Moment Market Models JF - The Journal of Alternative Investments SP - 37 LP - 51 DO - 10.3905/jai.2005.608031 VL - 8 IS - 3 AU - Angelo Ranaldo AU - Laurent Favre Y1 - 2005/12/31 UR - https://pm-research.com/content/8/3/37.abstract N2 - The CAPM model comes up short when explaining the superior performance of hedge funds in the past. This article argues that the Markowitz mean-variance criterion underpinning the traditional CAPM may fail to capture systematic features characterizing hedge fund performance. The two-moment market model is extended to a higher-moment model to accommodate coskewness and cokurtosis. The authors note that the higher-moment approach is more appropriate for capturing the non-linear relation between hedge fund and market returns and accounting for the specific risk-return payoffs of each hedge fund investment strategy. The key result is that the two-moment pricing model on a stand alone basis may be misleading and may wrongly indicate insufficient compensation for the investment risk. ER -