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The Impact of Non-Normality Risks and Tactical Trading on Hedge Fund Alphas

31 Pages Posted: 28 May 2008 Last revised: 6 Jun 2016

Harry M. Kat

Independent

Joëlle Miffre

Audencia School of Management; Audencia Business School

Abstract

Most previous tests of hedge fund performance have failed to model the exposure of hedge fund returns to systematic non-normality risks, nor have they taken the tactical asset allocation decisions of hedge funds managers into account. This paper shows that failure to account for these features leads to incorrect statistical inferences on the performance of 1 out of 4 hedge funds and overstates hedge funds' alpha by 1.54% on average. Put another way, hedge funds offer abnormal returns that are 23.1% lower than commonly accepted.

Keywords: Hedge funds, performance evaluation, alpha, systematic skewness, systematic kurtosis, tactical asset allocation

JEL Classification: G12, G23

Suggested Citation

Kat, Harry M. and Miffre, Joëlle, The Impact of Non-Normality Risks and Tactical Trading on Hedge Fund Alphas. EFA 2003 Glasgow; Journal of Alternative Investments, Vol. 10, No. 4, 2008. Available at SSRN: https://ssrn.com/abstract=424368 or http://dx.doi.org/10.2139/ssrn.424368

Harry M. Kat

Independent

No Address Available

Joelle Miffre (Contact Author)

Audencia School of Management ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

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