%0 Journal Article %A Harry M. Kat %A Joƫlle Miffre %T The Impact of Non-normality Risks and Tactical Trading on Hedge Fund Alphas %D 2008 %R 10.3905/jai.2008.705529 %J The Journal of Alternative Investments %P 8-21 %V 10 %N 4 %X In recent years, hedge funds have become very popular, with institutional investors. This article contributes to the debate on hedge fund performance by quantifying the omission non-normality risks and tactical trading when evaluating hedge fund returns. This is done by evaluating hedge fund performance using a model that treats systematic non-normality risks as a potential source of hedge fund returns. In addition, the tactical asset allocation decisions of fund managers are explicitly modeled. The results show that the arrival of public information alters the asset allocation of hedge fund managers and induces a change in the risk profile and performance of hedge funds. Further they indicate that failure to account for these two features leads to incorrect statistical inference on the performance of 1 out of 4 hedge funds and overstates alpha estimates. Overall, non-normality risks and tactical asset allocation explain no less than 23.1% of the commonly perceived abnormal performance of hedge funds.TOPICS: Real assets/alternative investments/private equity, risk management, performance measurement, portfolio construction %U https://jai.pm-research.com/content/iijaltinv/10/4/8.full.pdf