%0 Journal Article %A Angelo Ranaldo %A Laurent Favre %T Hedge Fund Performance and Higher-Moment Market Models %D 2005 %R 10.3905/jai.2005.608031 %J The Journal of Alternative Investments %P 37-51 %V 8 %N 3 %X The CAPM model comes up short when explaining the superior performance of hedge funds in the past. This article argues that the Markowitz mean-variance criterion underpinning the traditional CAPM may fail to capture systematic features characterizing hedge fund performance. The two-moment market model is extended to a higher-moment model to accommodate coskewness and cokurtosis. The authors note that the higher-moment approach is more appropriate for capturing the non-linear relation between hedge fund and market returns and accounting for the specific risk-return payoffs of each hedge fund investment strategy. The key result is that the two-moment pricing model on a stand alone basis may be misleading and may wrongly indicate insufficient compensation for the investment risk. %U https://jai.pm-research.com/content/iijaltinv/8/3/37.full.pdf