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Alternative Market Briefing

Study shows that hedge funds regularly break with conventional wisdom about performance

Thursday, January 26, 2012

Bailey McCann, Opalesque New York

New quantitative research shows that emerging managers in hedge funds regularly break with conventional wisdom about performance. Peter Urbani breaks down the pivotal findings in Opalesque New Managers - a new monthly publication focused on emerging managers (whose firm is less than 48-month old and started with under $600m in AuM) .

According to the study, hedge funds' return distributions are not normal twice as often as those of long-only funds. On the whole, returns are higher and drawdowns are lower across indices. Individual funds’ return distributions can differ from normal at least 25% of the time, Urbani notes.

In another finding, the Cornish Fisher modification to Value at Risk is potentially wrong almost half of the time. Urbani explains that while it is popular to use Cornish Fisher with modified Value at Risk calculations, the drawbacks in the formula can lead to imprecise results. These drawbacks, such as poor tail behavior may cause the cumulative distribution to turn either in the body or tail of the distribution.

Urbani notes that these results can impact nearly half of all hedge funds, and that anyone using Cornish Fisher should exercise caution when interpreting the results.

Results interpretation is also important when looking at alpha generated in a non-linear universe, such as the emerging manager hedge fu......................

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