Who Should Buy Hedge Funds? The Effects of Including Hedge Funds in Portfolios of Stocks and Bonds

20 Pages Posted: 16 Mar 2002

See all articles by Harry M. Kat

Harry M. Kat

Independent

Gaurav S. Amin

Albourne Partners; University of Reading - ICMA Centre

Date Written: March 6, 2002

Abstract

Using monthly return data on 455 hedge funds over the period 1994-2001 we study the diversification effects from introducing hedge funds into a traditional portfolio of stocks and bonds. Our results indicate that 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 and suggests that, contrary to popular belief, hedge funds might be more suitable for institutional than for private investors. Our results also emphasize the fact that to have at least some impact on the overall portfolio, one has to make an allocation to hedge funds which exceeds the typical 1-3% that many institutions are currently considering.

Keywords: Hedge funds, diversification, skewness, kurtosis, portfolio

JEL Classification: G11

Suggested Citation

Kat, Harry M. and Amin, Gaurav S., Who Should Buy Hedge Funds? The Effects of Including Hedge Funds in Portfolios of Stocks and Bonds (March 6, 2002). Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=303406 or http://dx.doi.org/10.2139/ssrn.303406

Harry M. Kat (Contact Author)

Independent

No Address Available

Gaurav S. Amin

Albourne Partners ( email )

16 Palace Street
London, SW1E 5JD
United Kingdom
02073467000 (Phone)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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