Research and publications
Optimal Hedge Fund Allocation with Improved Estimates for Coskewness and Cokurtosis Parameters
Since hedge fund returns are not normally distributed, mean-variance optimisation techniques, which would lead to substantial welfare losses from the investor’s perspective, need to be replaced by optimisation procedures incorporating higher-order moments and comoments. In this context, optimal portfolio decisions involving hedge fund style allocation require not only estimates for covariance parameters but also estimates for coskewness and cokurtosis parameters. This is a formidable challenge that severely exacerbates the dimensionality problem already present with mean-variance analysis. This paper presents an application of the improved estimators for higher-order co-moment parameters, recently introduced by Martellini and Ziemann (2010), in the context of hedge fund portfolio optimisation. A revisited version of this paper was published in the Winter 2012 issue of the Journal of Alternative Investments.
Author(s):
Asmerilda Hitaj, Lionel Martellini, Giovanni Zambruno
Summary:
Since hedge fund returns are not normally distributed, mean-variance optimisation techniques, which would lead to substantial welfare losses from the investor’s perspective, need to be replaced by optimisation procedures incorporating higher-order moments and comoments. In this context, optimal portfolio decisions involving hedge fund style allocation require not only estimates for covariance parameters but also estimates for coskewness and cokurtosis parameters. This is a formidable challenge that severely exacerbates the dimensionality problem already present with mean-variance analysis. This paper presents an application of the improved estimators for higher-order co-moment parameters, recently introduced by Martellini and Ziemann (2010), in the context of hedge fund portfolio optimisation. A revisited version of this paper was published in the Winter 2012 issue of the Journal of Alternative Investments.
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Register/Log in| Type : | EDHEC Publication |
|---|---|
| Date : | 28/09/2010 |
| Keywords : |
Alternative Investments |
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