The Impact of Non-Normality Risks and Tactical Trading on Hedge Fund Alphas

Posted: 22 May 2019

Abstract

Most previous tests of hedge fund performance have failed to model the exposure of hedge fund returns to systematic non-normality risks, nor have they taken the tactical asset allocation decisions of hedge funds managers into account. This paper shows that failure to account for these features leads to incorrect statistical inferences on the performance of 1 out of 4 hedge funds and overstates hedge funds' alpha by 1.54% on average. Put another way, hedge funds offer abnormal returns that are 23.1% lower than commonly accepted.

Keywords: Hedge funds, performance evaluation, alpha, systematic skewness, systematic kurtosis, tactical asset allocation

JEL Classification: G12, G23

Suggested Citation

Kat, Harry M. and Miffre, Joelle, The Impact of Non-Normality Risks and Tactical Trading on Hedge Fund Alphas. EFA 2003 Glasgow, Journal of Alternative Investments, Vol. 10, No. 4, 2008, https://doi.org/10.3905/jai.2008.705529 , Available at SSRN: https://ssrn.com/abstract=424368 or http://dx.doi.org/10.2139/ssrn.424368

Harry M. Kat

Independent

Joelle Miffre (Contact Author)

Audencia Business School ( email )

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