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The Performance Evaluation of Hedge Funds: Are Investors Mislead by Standard Mean-Variance Statistics?

Author

Listed:
  • De Ryck, Pieter

    (Van Lanschot Bankiers, Belgium)

  • Cole, Frank

    (Hogeschool-Universiteit Brussel (HUB), Belgium)

  • Smedts, Jan

    (Dexia Group, Belgium)

  • De Moor, Lieven

    (Hogeschool-Universiteit Brussel (HUB), Belgium
    Katholieke Universiteit Leuven, Belgium)

Abstract

In this paper we show that hedge fund returns may suffer from excess smoothness, positive kurtosis and negative skewness. We argue that these distribution properties cause standard mean-variance statistics to underestimate the true variability and beta, and overrate the true performance. We discuss alternatives that do take into account excess smoothness, kurtosis and skewness, such as unsmoothed returns, summed betas and VaR modifications based on the Cornish-Fisher expansion. We conclude that the investor is, partly, mislead by standard mean-variance statistics as the performance of the hedge funds under consideration turns out to be significantly lower if higher moments and excess smoothness are taken into account. We end with a short digression on the hidden risks of hedge funds that are, to our knowledge, not taken into account by any performance model at the moment.

Suggested Citation

  • De Ryck, Pieter & Cole, Frank & Smedts, Jan & De Moor, Lieven, 2007. "The Performance Evaluation of Hedge Funds: Are Investors Mislead by Standard Mean-Variance Statistics?," Working Papers 2007/40, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
    • Handle: RePEc:hub:wpecon:200740
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    File URL: http://lirias.hubrussel.be/handle/123456789/2195
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    More about this item

    Keywords

    hedge funds; performance evaluation; skewness; kurtosis; modified Value-at Risk; Cornish-Fisher;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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