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Hedge Fund Performance & Higher-Moment Market Models

Angelo Ranaldo & Laurent Favre

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versione breve The CAPM model is hard put to explain the superior performance of hedge funds in the past. We argue that the Markowitz mean-variance criterion underpinning the traditional CAPM may fail to capture systematic features characterizing hedge fund performance. Thus, we extend the twomoment market model to a higher-moment model to accommodate coskewness and cokurtosis. The higher-moment approach is more appropriate for capturing the non-linear relation between hedge fund and market returns and accounting for the specific risk-return payoffs of each hedge fund investment strategy. The key result is that the use solely of the two-moment pricing model may be misleading and may wrongly indicate insufficient compensation for the investment risk.
   
tipo Journal paper
   
parole chiave Hedge Funds, Higher Moments, Skewness, Kurtosis, Coskewness, and Cokurtosis
   
lingua English
kind of paper journal article
data di apparenza 2005
giornale Journal of Alternative Investments
Editore IIJ (New York)
DOI 10.3905/jai.2005.608031
edizione del giornale 8
numero del giornale 3
pagine 37-51
review double-blind review
   
citation Ranaldo, A., & Favre, L. (2005). Hedge Fund Performance & Higher-Moment Market Models. Journal of Alternative Investments, 8(3), 37-51, DOI:10.3905/jai.2005.608031.