The Performance Evaluation of Hedge Funds: Are Investors Mislead by Standard Mean-Variance Statistics?
AbstractIn this paper we show that hedge fund returns may suffer from excess smoothness, positive kurtosis and negative skewness. We argue that these distribution properties cause standard mean-variance statistics to underestimate the true variability and beta, and overrate the true performance. We discuss alternatives that do take into account excess smoothness, kurtosis and skewness, such as unsmoothed returns, summed betas and VaR modifications based on the Cornish-Fisher expansion. We conclude that the investor is, partly, mislead by standard mean-variance statistics as the performance of the hedge funds under consideration turns out to be significantly lower if higher moments and excess smoothness are taken into account. We end with a short digression on the hidden risks of hedge funds that are, to our knowledge, not taken into account by any performance model at the moment.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Hogeschool-Universiteit Brussel, Faculteit Economie en Management in its series Working Papers with number 2007/40.
Length: 20 pages
Date of creation: Nov 2007
Date of revision:
hedge funds; performance evaluation; skewness; kurtosis; modified Value-at Risk; Cornish-Fisher;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sabine Janssens).
If references are entirely missing, you can add them using this form.