Autocorrelation, Bias, and Fat Tails - Are Hedge Funds Really Attractive Investments?
Hedge funds have become an increasingly popular investment tool in the past decade,due to their general lack of correlation with stocks and bond markets. Whenevaluating using the Markowitz portfolio selection theory, hedge funds appear tooffer a remarkable opportunity. Yet use of the Markowitz theory neglects three importantqualities of hedge funds: the existence of significant autocorrelation, bias,and fat tails. Each of these three issues has been studied individually, but no literatureexists in which their combined effect is considered. The purpose of the researchreported here is to evaluate hedge fund performance incorporating thesecombined effects. The results indicate that hedge funds lose most of their attractivenesswhen accounting for the existence of autocorrelation, bias, and fat tails inthe evaluation.
G11 - Portfolio Choice ; G29 - Financial Institutions and Services. Other ; Management of insurance ; Individual Working Papers, Preprints ; No country specification