Stocks, Bond and Hedge Funds: Not a Free Lunch
AbstractWe study the diversification effects from introducing hedge funds into a traditional portfolio of stocks and bonds. Our results make it clear that in terms of skewness and kurtosis equity and hedge funds do not combine very well. 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 as well as higher kurtosis. This means that the case for hedge funds includes a definite trade-off between profit and loss potential. Our results also emphasize that to have at least some impact on the overall portfolio, investors will have to make an allocation to hedge funds which by far exceeds the typical 1-5% that many institutions are currently considering.
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Bibliographic InfoPaper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2002-11.
Length: 28 pages
Date of creation: Apr 2002
Date of revision:
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jean, William H., 1973. "More on Multidimensional Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 8(03), pages 475-490, June.
- Simkowitz, Michael A. & Beedles, William L., 1978. "Diversification in a Three-Moment World," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(05), pages 927-941, December.
- Chris Brooks & Harry. M Kat, 2001. "The Statistical Properties of Hedge Fund Index Returns," ICMA Centre Discussion Papers in Finance icma-dp2001-09, Henley Business School, Reading University.
- Boyson, Nicole M. & Stahel, Christof W. & Stulz, Rene M., 2006.
"Is There Hedge Fund Contagion?,"
Working Paper Series
2006-1, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- Nicole M. Boyson & Christof W. Stahel & Rene M. Stulz, 2006. "Is There Hedge Fund Contagion?," NBER Working Papers 12090, National Bureau of Economic Research, Inc.
- Boyson, Nicole & Stahel, Christof & Stulz, Rene, 2008. "Is There Hedge Fund Contagion," Working Papers 08-2, University of Pennsylvania, Wharton School, Weiss Center.
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