Written on 21 February 2012.
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 in New York from April 11 to 13, 2012.
More information on this seminar can be found through the following link:
A copy of the research chair study from which the article in the Journal of Alternative Investments was drawn can be found here: