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EDHEC-Risk Institute research provides insights into optimal hedge fund allocation

Wednesday, February 15, 2012

Professor Lionel Martellini
Opalesque Industry Update - In a research paper published in the Winter 2012 issue of the Journal of Alternative Investments, entitled “Optimal Hedge Fund Allocation with Improved Estimates for Coskewness and Cokurtosis Parameters,” EDHEC-Risk Institute has provided insights into optimal portfolio decisions involving hedge funds.

Drawn from research conducted as part of the “Advanced Modelling for Alternative Investments” research chair at EDHEC-Risk Institute, supported by the Prime Brokerage Group at Newedge, the paper presents an application of the improved estimators for higher-order co-moment parameters, in the context of hedge fund portfolio optimisation.

The authors find that the use of these enhanced estimates generates a significant improvement for investors in hedge funds. It is only when improved estimators are used and the sample size is sufficiently large that portfolio selection with higher-order moments consistently dominates mean–variance analysis from an out-of-sample perspective. The results have important potential implications for hedge fund investors and hedge fund of funds managers who routinely use portfolio optimisation procedures incorporating higher moments.

The subject of improved hedge fund diversification will be addressed by Professor Lionel Martellini as part of the forthcoming Alternative Asset Allocation seminar: Programme Alternative Asset Allocation Seminar, New York, April 11-13, 2012

A copy of the research chair study from which the article in the Journal of Alternative Investments was drawn can be found here: EDHEC-Risk Publication Optimal Hedge Fund Allocation with Improved Estimates for Coskewness and Cokurtosis Parameters

(press release)

About EDHEC-Risk Institute
Since 2001, EDHEC has been pursuing an ambitious policy in terms of international research. This policy, known as “Research for Business”, aims to make EDHEC an academic institution of reference for the industry in a small number of areas in which the school has reached critical mass in terms of expertise and research results.


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