Measuring Hedge Fund Risk with Multi-Moment Risk Measures
Posted: 13 May 2002
Date Written: April 2002
Alternative investments, and especially hedge funds, often have 1) non-normally distributed returns and 2) attributes like thin trading or limited liquidity, both being characteristic to this class of investments. In this paper, I propose a higher moment-based distributional risk measure, termed as variance-equivalent, which is designed to account exactly for the above features. This class of risk measures is based on the consideration that investors trade return moments within the set of available investments. This notion also provides a unique risk adjustment method, which is tested empirically on a sample of mutual and hedge funds. Comparing these moment-based risk measures with other, conventional measures of risk, such as the variance or downside deviation, they are examined for efficiency in terms of opportunity costs when using the given criteria as an ex ante decision tool for portfolio performance.
Keywords: Risk assessment, Non-normality of returns, Distributional risk measures, Variance-equivalent
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation