An Excursion into the Statistical Properties of Hedge Fund Returns

26 Pages Posted: 17 May 2002

See all articles by Harry M. Kat

Harry M. Kat


Sa Lu

ISMA Centre, University of Reading

Date Written: May 1, 2002


This paper provides an overview of the most important statistical properties of individual hedge fund returns. We find that the net-of-fees monthly returns of the average individual hedge fund exhibit significant degrees of negative skewness, excess kurtosis, as well as positive first-order serial correlation. The correlations between hedge funds in the same strategy group are of the same order of magnitude as the correlations between funds in different strategy groups and relatively low. Only 10-20% of the variation in the average individual hedge fund's returns can be explained by what happens in the US equity and bond markets. Compared to individual funds, portfolios of hedge funds tend to exhibit lower skewness, higher serial correlation and higher correlation with stocks and bonds. Movements in the US equity and bond markets still only explain 20-40% of the variation in hedge fund portfolios returns though. Finally, an equally-weighted portfolio of all funds in our sample offers a 2.76% higher mean return than the average fund of funds. This strongly suggests that the timing and fund picking activities of the average fund of funds are not rewarded by a higher return.

JEL Classification: G10, G20

Suggested Citation

Kat, Harry M. and Lu, Sa, An Excursion into the Statistical Properties of Hedge Fund Returns (May 1, 2002). Cass Business School Research Paper, Available at SSRN: or

Sa Lu

ISMA Centre, University of Reading ( email )

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

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics