Research and publications

The Difficulties of Measuring the Benefits of Hedge Funds

In this paper, the use mean-variance approach for the determination of the benefits of allocations to hedge funds is critically evaluated. The advantages of investing in hedge funds are often explained and demonstrated with reference to a shift in the efficiency frontier of traditional portfolios. The added value of hedge funds is almost always indicated in a mean-standard deviation environment and should in our view be reconsidered. The estimated risk exposure can be quantified by the introduction of Value-at-risk analysis corrected according to higher moments of distribution. With this new risk measure, we are able to obtain a corrected value. A revisited version of this paper was published in the Summer 2002 issue of the Journal of Alternative Investments.

Author(s):

Laurent Favre, Andreas Signer

Summary:

In this paper, the use mean-variance approach for the determination of the benefits of allocations to hedge funds is critically evaluated. The advantages of investing in hedge funds are often explained and demonstrated with reference to a shift in the efficiency frontier of traditional portfolios. The added value of hedge funds is almost always indicated in a mean-standard deviation environment and should in our view be reconsidered. The estimated risk exposure can be quantified by the introduction of Value-at-risk analysis corrected according to higher moments of distribution. With this new risk measure, we are able to obtain a corrected value. A revisited version of this paper was published in the Summer 2002 issue of the Journal of Alternative Investments.

Register to download PDF

Register/Log in

Type :	Working paper
Date :	13/06/2002
Keywords :	Asset Allocation

About EDHEC

Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the world’s top 15 business schools. Fully international and directly connected to the business world, EDHEC commands a strong reputation for research excellence and the ability to train entrepreneurs and managers capable of breaking new ground. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching is inspired by its research work and a focus on “learning by doing”, all with the aim of equipping people with the skills to succeed in business.

About EDHEC-Risk Climate Impact Institute

Marking the priority assigned by the School to sustainability issues and building on its research programmes exploring the relationships between climate change and finance, EDHEC-Risk Institute became EDHEC-Risk Climate Impact Institute in October 2022. The Institute's mission is to help private and public decision-makers manage climate-related financial risks and make the best use of the financial tools available to transition to low-emission and climate-resilient economies. The Institute’s research programmes explore the relationships between climate change and finance and our key ambition is to become a leading academic reference point for long-term investors, helping them to manage the asset-pricing implications of climate change as well as mitigation and adaptation efforts.