Strategic Hedge Fund Portfolio Construction that Incorporates Higher Moments

43 Pages Posted: 4 Jan 2008

See all articles by Dieter G. Kaiser

Dieter G. Kaiser

Robus Capital Management Limited; Frankfurt School of Finance & Management

Denis Schweizer

Concordia University

Date Written: January 4, 2008

Abstract

In this paper we optimize a hedge fund portfolio considering higher moments of the different hedge fund strategy return distributions. We replace the empirical return distributions which are often skewed or exhibit excess-kurtosis with two normal distributions to approximate a best-fit distribution. This procedure is known as the mixture of normal method and is widely used in financial applications. We then use the estimated return distributions in the strategy optimization. Further we incorporate that institutional investors and in particular fund of hedge fund managers seek an optimal allocation of resources and therefore only execute a limited number of due diligence processes. Furthermore real investor's preferences are con-sidered in optimization procedure. In order to test our results for stability we use robustness tests which allow for the time-varying correlation structures of the strategies.

Keywords: Asset Allocation, Hedge Fund, Higher Moments

JEL Classification: G2, G12, G31

Suggested Citation

Kaiser, Dieter G. and Schweizer, Denis, Strategic Hedge Fund Portfolio Construction that Incorporates Higher Moments (January 4, 2008). Available at SSRN: https://ssrn.com/abstract=1080509 or http://dx.doi.org/10.2139/ssrn.1080509

Dieter G. Kaiser (Contact Author)

Robus Capital Management Limited ( email )

25 Macklin Street
London, WC2B 5NN
United Kingdom
+496172-6816752 (Phone)

HOME PAGE: http://www.frankfurt-school.de/content/en/cpqf/team/Kaiser.html

Frankfurt School of Finance & Management ( email )

Sonnemannstra?e 9-11
Frankfurt am Main, 60314
Germany

Denis Schweizer

Concordia University ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada
+1 (514) 848-2424 ext. 2926 (Phone)
+1 (514) 848-4500 (Fax)

HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

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