Stocks, Bonds and Hedge Funds: Not a Free Lunch!

20 Pages Posted: 17 May 2002

See all articles by Harry M. Kat

Harry M. Kat

Independent

Gaurav S. Amin

Albourne Partners; University of Reading - ICMA Centre

Date Written: April 29, 2002

Abstract

We study the diversification effects from introducing hedge funds into a traditional portfolio of stocks and bonds. Our results make it clear that in terms of skewness and kurtosis equity and hedge funds do not combine very well. 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. Our results also emphasize that to have at least some impact on the overall portfolio, investors will have to make an allocation to hedge funds which by far exceeds the typical 1-5% that many institutions are currently considering.

Keywords: Hedge funds, asset allocation, diversification, skewness, kurtosis, optimization, mean-variance

JEL Classification: G11, G23

Suggested Citation

Kat, Harry M. and Amin, Gaurav S., Stocks, Bonds and Hedge Funds: Not a Free Lunch! (April 29, 2002). Cass Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=310224 or http://dx.doi.org/10.2139/ssrn.310224

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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