The Impact of Non-Normality Risks and Tactical Trading on Hedge Fund Alphas
Harry M. Kat
EDHEC Business School
May 24, 2006
EFA 2003 Glasgow
Cass Business School Finance Working Paper No. WP-FF-21-2005
Most previous tests of hedge fund performance have failed to model the exposure of hedge fund returns to systematic non-normality risks, nor have they taken the tactical asset allocation decisions of hedge funds managers into account. This paper shows that failure to account for these features leads to incorrect statistical inferences on the performance of 1 out of 4 hedge funds and overstates hedge funds' alpha by 1.54% on average. Put another way, hedge funds offer abnormal returns that are 23.1% lower than commonly accepted.
Number of Pages in PDF File: 27
Keywords: Hedge funds, performance evaluation, alpha, systematic skewness, systematic kurtosis, tactical asset allocation
JEL Classification: G12, G23working papers series
Date posted: August 3, 2003
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