Advanced Search
MyIDEAS: Login to save this paper or follow this series

Taking the Sting out of Hedge Funds

Contents:

Author Info

  • Harry. M Kat

    ()
    (ICMA Centre, University of Reading)

Abstract

Although the inclusion of hedge funds in an investment portfolio can significantly improve that portfolio’s mean-variance characteristics, it can also be expected to lead to significantly lower skewness and higher kurtosis. In this paper we show how this highly undesirable side-effect can be neutralized by allocating a fraction of wealth to out-of-the-money put options on the relevant equity index. Based on monthly return data over the period 1994-2001 we show that investors who want to fully eradicate the negative skewness of portfolios containing stocks, bonds and hedge funds will have to sacrifice a not insignificant part of their expected return. Investors who limit themselves to neutralizing only the additional skewness caused by the inclusion of hedge funds will be able to do so at much more favourable terms, however. The latter only need to allocate a small fraction of wealth to index puts and accept a drop in expected return that is unlikely to exceed 1% per annum, depending on the hedge fund allocation. This means that in the current low interest rate environment the costs of eliminating the unwanted skewness effect of hedge funds need not be prohibitively high.

Download Info

If 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.
File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2002-22.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2002-22.

as in new window
Length: 24 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:rdg:icmadp:icma-dp2002-22

Contact details of provider:
Postal: PO Box 218, Whiteknights, Reading, Berks, RG6 6AA
Phone: +44 (0) 118 378 8226
Fax: +44 (0) 118 975 0236
Web page: http://www.henley.reading.ac.uk/
More information through EDIRC

Related research

Keywords:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:rdg:icmadp:icma-dp2002-22. See general 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: (Ed Quick).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.