RT Journal Article
SR Electronic
T1 Hedge Fund Performance and Higher-Moment Market Models
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP 37
OP 51
DO 10.3905/jai.2005.608031
VO 8
IS 3
A1 Angelo Ranaldo
A1 Laurent Favre
YR 2005
UL https://pm-research.com/content/8/3/37.abstract
AB 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.