The Impact of Illiquidity and Higher Moments of Hedge Fund Returns on Their Risk-Adjusted Performance and Diversification Potential

Cavenaile, Laurent; Coen, Alain; Hübner, Georges

doi:10.3905/jai.2011.13.4.009

Article (Scientific journals)

The Impact of Illiquidity and Higher Moments of Hedge Fund Returns on Their Risk-Adjusted Performance and Diversification Potential

Cavenaile, Laurent; Coen, Alain; Hübner, Georges

2011 • In Journal of Alternative Investments, 13 (4)

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https://hdl.handle.net/2268/87828

DOI
10.3905/jai.2011.13.4.009

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Keywords :

Hedge Fund Performance; Illiquidity; Non-Gaussian Returns; Portfolio Diversification; Modified Value-at-Risk

Abstract :

[en] This paper studies the joint impact of smoothing and fat tails on the risk-return properties of hedge fund strategies. First, we adjust risk and performance measures for illiquidity and the non-Gaussian distribution of hedge funds returns. We use two risk metrics: the Modified Value-at-Risk and a preference-based measure retrieved from the linear-exponential utility function. Second, we revisit the hedge fund diversification effect with these adjustments for illiquidity. Our results report similar fund performance rankings and optimal hedge fund strategy allocations for both adjusted metrics. We also show that the benefits of hedge funds in portfolio diversification are still persistent but tend to weaken after the adjustment for illiquidity.

Disciplines :

Finance

Author, co-author :

Cavenaile, Laurent ; Université de Liège - ULiège > HEC-Ecole de gestion : UER > UER Finance et Droit

Coen, Alain; Université du Québec à Montréal

Hübner, Georges ; Université de Liège - ULiège > HEC-Ecole de gestion : UER > Gestion financière

Language :

English

Title :

The Impact of Illiquidity and Higher Moments of Hedge Fund Returns on Their Risk-Adjusted Performance and Diversification Potential

Publication date :

March 2011

Journal title :

Journal of Alternative Investments

ISSN :

1520-3255

Publisher :

Euromoney Institutional Investor PLC

Volume :

Issue :

Peer reviewed :

Peer Reviewed verified by ORBi

Available on ORBi :

since 28 March 2011

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