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The Statistical Properties of Hedge Fund Index Returns

Author

Listed:
  • Chris Brooks

    (ICMA Centre, University of Reading)

  • Harry. M Kat

    (ICMA Centre, University of Reading)

Abstract
he monthly return distributions of many hedge fund indices exhibit highly unusual skewness and kurtosis properties as well as first-order serial correlation. This has important consequences for investors. We demonstrate that although hedge fund indices are highly attractive in mean-variance terms, this is much less the case when skewness, kurtosis and autocorrelation are taken into account. Sharpe Ratios will substantially overestimate the true risk-return performance of (portfolios containing) hedge funds. Similarly, mean-variance portfolio analysis will over-allocate to hedge funds and overestimate the attainable benefits from including hedge funds in an investment portfolio. We also find substantial differences between indices that aim to cover the same type of strategy. Investors' perceptions of hedge fund performance and value added will therefore strongly depend on the indices used.

Suggested Citation

  • Chris Brooks & Harry. M Kat, 2001. "The Statistical Properties of Hedge Fund Index Returns," ICMA Centre Discussion Papers in Finance icma-dp2001-09, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2001-09
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    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2001-09.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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