Autocorrelation, Bias, and Fat Tails - Are Hedge Funds Really Attractive Investments?

Derivatives Use, Trading & Regulation, Vol. 12, No. 1, pp. 28-47, 2006

27 Pages Posted: 14 Dec 2005  

Martin Eling

University of St. Gallen - Institute of Insurance Economics; University of Saint Gallen - School of Finance (SoF)

Abstract

In the literature, hedge funds often are evaluated by Markowitz portfolio selection theory, under which hedge funds appear to be a remarkable opportunity, seeing as they are characterized by low correlations to stock and bond markets and therefore offer the chance of better portfolio diversification. However, this approach neglects three problems concerning the returns of this alternative type of investment. When comparing the returns of hedge funds to those of traditional investments, the former show a significant extent of autocorrelation, bias, and fat tails. When these problems are incorporated in a performance evaluation of hedge funds, this type of fund loses most of its attraction.

Keywords: Hedge Funds, Alternative Investments, Performance Measurement

Suggested Citation

Eling, Martin, Autocorrelation, Bias, and Fat Tails - Are Hedge Funds Really Attractive Investments?. Derivatives Use, Trading & Regulation, Vol. 12, No. 1, pp. 28-47, 2006. Available at SSRN: https://ssrn.com/abstract=869769

Martin Eling (Contact Author)

University of St. Gallen - Institute of Insurance Economics ( email )

Kirchlistrasse 2
St. Gallen, 9010
Switzerland

University of Saint Gallen - School of Finance (SoF) ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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