Optimal Hedge Fund Allocations: Do Higher Moments Matter?

Optimal portfolio allocation with higher moments

“…The numbers are relatively low, especially for a context of low volatility (as it was most of the time period covered by the sample used by Campbell et al 1996). This is consistent also with Cremers et al (2004). In Fig.…”

“…An alternative method to study higher moments is "full-scale optimization" (see Adler and Kritzman 2005, for an explanation of this method). Using this method, Cremers et al (2004) find that the welfare cost of ignoring higher moments (as in mean-variance optimization) is not substantial.…”

Skulls, Financial Turbulence, and Risk Management

“…We used the modified training data to identify the conditioned full-scale optimal portfolio. Full-scale optimization uses a search algorithm to identify a set of asset weights that maximize expected utility given a sample of returns and a utility function (see Cremers et al 2005 for a detailed description). We used a kinked utility function in which utility changes abruptly at a threshold return level.…”

Return Explanatory Ability and Predictability of Non-Linear Market Models

“…Harvey, Liechty, Liechty and Muller (2004) evaluated the use of the higher moments of multivariate returns in portfolio selection and, on the basis of a Bayesian framework for incorporating the higher moments into the portfolio selection decision, demonstrated their importance in respect of maximizing expected utility. Davies, Kat, and Lu (2005) and Cremers, Kritzman and Page (2005) also demonstrated that the higher moments are particularly important in portfolio selection and allocation decisions of hedge funds since the return distributions associated with this asset class are typically highly skewed and leptokurtic (e.g., Brulhart and Klein, 2005).…”