Building a Hedge Fund Portfolio with Kurtosis and Skewness

Mean-Variance optimization has long played an important role in portfolio construction. These traditional methods have been applied to hedge funds, but recent research indicates that hedge fund return distributions are distinctly non-normal. That is, hedge fund return distributions exhibit considera...

Full description

Saved in:
Bibliographic Details
Published in:The journal of alternative investments 2007-07, Vol.10 (1), p.25-34
Main Authors: Anson, Mark J.P, Ho, Ho, Silberstein, Kurt
Format: Article
Language:English
Subjects:
Bias
Construction
Due diligence
Expected values
Hedge funds
Investment policy
Investments
Kurtosis
Normal distribution
Optimization
Optimization techniques
Portfolio management
Rates of return
Skewness
Studies
Volatility
Citations: Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Mean-Variance optimization has long played an important role in portfolio construction. These traditional methods have been applied to hedge funds, but recent research indicates that hedge fund return distributions are distinctly non-normal. That is, hedge fund return distributions exhibit considerable leptokurtosis and skewness. Consequently, traditional mean-variance optimization will lead to sub-optimal results. This article incorporates skewness and kurtosis into the hedge fund selection process and applies it to a "live" portfolio of hedge funds. The results show that multi-moment optimizations produced superior portfolios with higher Sharpe Ratios while explicitly accounting for kurtosis and skewness. [PUBLICATION ABSTRACT]
ISSN:1520-3255
2168-8435
DOI:10.3905/jai.2007.688991