TY - JOUR T1 - The Impact of Illiquidity and Higher Moments of<br/>Hedge Fund Returns on Their Risk-Adjusted<br/>Performance and Diversification Potential JF - The Journal of Alternative Investments SP - 9 LP - 29 DO - 10.3905/jai.2011.13.4.009 VL - 13 IS - 4 AU - Laurent Cavenaile AU - Alain Coën AU - Georges Hübner Y1 - 2011/03/31 UR - https://pm-research.com/content/13/4/9.abstract N2 - This article studies the joint impact of smoothing and fat tails on the risk–return properties of hedge fund strategies. First, the authors adjust risk and performance measures for illiquidity and the non-Gaussian distribution of hedge funds returns. They use two risk metrics: the Modified Value-at-Risk and a preference-based measure retrieved from the linear exponential utility function. Second, they revisit the hedge fund diversification effect with these adjustments for illiquidity. Their results report similar fund performance rankings and optimal hedge fund strategy allocations for both adjusted metrics. They also show that the benefits of hedge funds in portfolio diversification persist but tend to weaken after adjustments for illiquidity are made.TOPICS: Real assets/alternative investments/private equity, tail risks, statistical methods, portfolio construction ER -