Optimal Hedge Fund Allocation with Asymmetric Preferences and Distributions
45 Pages Posted: 4 May 2006
Date Written: May 1, 2006
Abstract
Hedge funds typically have non-normal return distributions marked by significant positive or negative skewness and high kurtosis. Mean-variance optimization models ignore these higher moments of the return distribution, and thus fail to convince investors who care about the unwanted skewness and kurtosis that hedge funds may work well in a portfolio. We use a new method which incorporates Monte Carlo simulation and optimization to solve for a variety of investment objectives and address the special issues of hedge fund allocation. We applied the new optimization model to examine the effects of semi-variance, conditional third and fourth moments on portfolio allocation with hedge funds. We show that conditional on the investor's objective, a substantial allocation to hedge funds is justified even with consideration for the highly unusual skewness and kurtosis.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Offshore Hedge Funds: Survival and Performance 1989-1995
By Stephen J. Brown, William N. Goetzmann, ...
-
Offshore Hedge Funds: Survival and Performance 1989-1995
By Stephen J. Brown, William N. Goetzmann, ...
-
Characteristics of Risk and Return in Risk Arbitrage
By Mark L. Mitchell and Todd C. Pulvino
-
Offshore Hedge Funds: Survival & Performance 1989-1995
By William N. Goetzmann, Roger G. Ibbotson, ...
-
Offshore Hedge Funds: Survival & Performance 1989-1995
By Stephen J. Brown, William N. Goetzmann, ...
-
An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns
By Mila Getmansky Sherman, Andrew W. Lo, ...
-
An Econometric Model of Serial Correlation and Illiquidity in Hedge Fund Returns
By Mila Getmansky Sherman, Andrew W. Lo, ...
-
Hedge Funds: The Living and the Dead
By Bing Liang
-
Flows, Performance, and Managerial Incentives in Hedge Funds
By Vikas Agarwal, Naveen D. Daniel, ...