PT  - JOURNAL ARTICLE
AU  - Chris Brooks
AU  - Harry M. Kat
TI  - The Statistical Properties of Hedge Fund Index Returns and Their Implications for Investors
AID  - 10.3905/jai.2002.319053
DP  - 2002 Sep 30
TA  - The Journal of Alternative Investments
PG  - 26--44
VI  - 5
IP  - 2
4099  - https://pm-research.com/content/5/2/26.short
4100  - https://pm-research.com/content/5/2/26.full
AB  - The 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. Although many 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 overestimate the benefits of including hedge funds in an investment portfolio and therefore overallocate to hedge funds. 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.