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The Journal of Wealth Management

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Primary Article

10 Things That Investors Should Know About Hedge Funds

Harry M. Kat
The Journal of Wealth Management Spring 2003, 5 (4) 72-81; DOI: https://doi.org/10.3905/jwm.2003.320466
Harry M. Kat
Professor of risk management and director of the Alternative Investment Research Centre at Cass Business School, City University, London.
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Abstract

In this article, the author reviews some of the most important findings in hedge fund research so far. We show that proper hedge fund investing requires a much more elaborate approach to investment decision-making than currently in use by most investors. The available data on hedge funds should be corrected for various types of errors, survivorship bias, and autocorrelation. In addition, tools like mean-variance analysis and the Sharpe ratio are no longer appropriate when hedge funds are involved. Including hedge funds in a traditional investment portfolio can significantly improve that portfolio's mean-variance characteristics, but it can also be expected to lead to significantly lower skewness as well as higher kurtosis. This means that the case for hedge funds is a lot less straightforward than often suggested and requires investors to make a definite trade-off between profit and loss potential.

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The Journal of Wealth Management
Vol. 5, Issue 4
Spring 2003
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10 Things That Investors Should Know About Hedge Funds
Harry M. Kat
The Journal of Wealth Management Jan 2003, 5 (4) 72-81; DOI: 10.3905/jwm.2003.320466

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10 Things That Investors Should Know About Hedge Funds
Harry M. Kat
The Journal of Wealth Management Jan 2003, 5 (4) 72-81; DOI: 10.3905/jwm.2003.320466
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