Help! Higher kurtosis means higher peak and fatter tails right? Lower kurtosis means lower peak and thinner tails right? Which one would a hedge fund prefer? Is it better to have higher kurtosis or lower kurtosis? Thanks.
I think hedge funds would prefer to have positive skewness and positive kurtosis. Important you incorporate skewness because that would distribute the range of returns more in your favour. Positive skewness with higher kurtosis would mean a higher chance of abnormally high returns. High kurtosis would also mean higher chance of lower returns, however with the positive skewness your lower returns are not as low assuming the distribution was negatively skewed or normally distributed. Does this make sense?
Yup So HFs prefer positive skewness , and prefer higher positive skewness than lower positive skewness Thanks!
Is it that lower kurtosis means lower peak and has less frequent extremely large deviation from the mean and higher kurtosis has fatter tail, so lower kurtosis shall be prefered for HF ? Anyone else can clarify ?
AMC, You are correct in that Lower Kurtosis means lower peak and less extremely large deviations from the mean (thinner tails), and that Higher Kurtosis means higher peak and more extremely large deviations from the mean (fatter tails). As for which HFs prefer, that was my original question! Chovies81 thinks HFs prefer Higher Positive Kurtosis. Can someone please reconfirm or clarify? Thanks.
If it’s positive, higher kurtosis is ok, but it can’t be positive always. So, I think lower kurtosis is better from return/risk perspective.
bidder Wrote: ------------------------------------------------------- > Help! > > Higher kurtosis means higher peak and fatter tails > right? > Lower kurtosis means lower peak and thinner tails > right? > > Which one would a hedge fund prefer? Is it better > to have higher kurtosis or lower kurtosis? Thanks. why do you ask whether high kurtosis or low kurtosis a hedge fund prefers? Does this come from any Qs in Scheweser? HF returns, on average, display some skewness (asymmetry of return distribution), as well as high kurtosis (relatively frequent extreme returns). This is because of the option-like payoff characteristics of many HF strategies.
AMC Wrote: ------------------------------------------------------- > Is it that lower kurtosis means lower peak and has > less frequent extremely large deviation from the > mean and higher kurtosis has fatter tail, so lower > kurtosis shall be prefered for HF ? > > Anyone else can clarify ? yes, positive skewness and low kurtosis together means lower downside risk.
There is LOS that asks you to evaluate HF performance, and in the Reading, Kurtosis was provided as a measure of HF performance. So do HFs prefer higher or lower kurtosis?
I would say they want lower kurtosis. they are absolute return vehicles. They wouldnt want to miss their absolute return benchmark 9 times out fo 10, only to have the 10th time be well above the benchmark. That is textbook hedge fund tho, in the real world these guys leverage so much that they look for huge returns. But according to CFAI, hedge funds should actually “hedge” which would ultimately look to nullify outliers and try their best to beat the absolute return benchmark (which is relatively low).
Pg.89, Vol. 5 gives a quick summary of Skewness and Kurtosis. “If one investment has higher kurtosis than another, it tends to have more instances of extreme returns”. “For consistency, a fund should have a greater percentage of positive returns and less negative returns than the benchmark in all market conditions” I guess from what I understand, HFs would prefer lower Kurtosis with positve skewness.
Ok, so it depends on the style of the HF and the investment mandate of the HF then Best to provide an answer with both Kurtosis and Skewness then HFs want Negative Skewness (i.e. more positive returns than negative returns) and HFs want Higher Kurtosis (if they are more risk tolerant) or Lower Kurtosis (if they are less risk tolerant)
from what i remember/took away from the cfai books its that hedge funds are relatively less risk tolerant (from a text book perspective). Because they are hedged. So if i was given the choice of a general HF on test and whether it’d want higher or lower kurtosis, i’d choose lower kurtosis. This is just my takeaway from the textbook and not my perspective on how the real world “hedge” funds operate.
Leptokurtic distribution (excess kurtosis) is basically always bad. Fatter tails mean bigger risks. Bigger risks amp up the cost of hedging. Remember, the text book hedge fund is looking to be risk neutral, just picking off alpha. Hedge funds want platykurtic distribution (skinny tails).