Optimal Hedge Fund Allocations : Do Higher Moments Matter?
Hedge funds have return peculiarities not commonly associated with traditional investment vehicles. Specifically, hedge funds seem more inclined to produce return distributions with significantly non-normal skewness and kurtosis. There is also growing acceptance of the notion that investor preferences are better represented by bilinear utility functions or S-shaped value functions than by neo-classical utility functions such as power utility. Many investors have therefore concluded that mean-variance optimization is not appropriate for forming portfolios that include hedge funds. We apply both mean-variance optimization and full-scale optimization to form portfolios of hedge funds, given a wide range of assumptions about investor preferences. We find that higher moments of hedge funds do not meaningfully compromise the efficacy of mean-variance optimization if investors have power utility. We also find, however, that mean-variance optimization is not particularly effective for identifying optimal hedge fund allocations if preferences are bilinear or S-shaped. Finally, we show that investors with bilinear utility dislike kurtosis and that, contrary to conventional wisdom, investors with S-shaped preferences are attracted to kurtosis as well as negative skewness. Mean-variance optimization is insensitive to these preferences
Year of publication: |
[2004]
|
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Authors: | Cremers, Jan-Hein |
Other Persons: | Kritzman, Mark (contributor) ; Page, Sebastien (contributor) |
Publisher: |
[2004]: [S.l.] : SSRN |
Saved in:
freely available
Extent: | 1 Online-Ressource (23 p) |
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Type of publication: | Book / Working Paper |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments September 3, 2004 erstellt |
Other identifiers: | 10.2139/ssrn.587384 [DOI] |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10012737966
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