Traditional portfolio analysis calculates the most efficient portfolio using return, correlation and volatility of assets. However, it is difficult to apply traditional portfolio analysis to hedge funds because: (1) it is difficult to develop accurate expected returns, (2) hedge fund correlation, beta exposures, and volatility can change over time, and (3) standard deviation is not a complete measure of hedge fund risk due to higher moment risks such as skewness and kurtosis. This is due to non-normal distribution of hedge fund returns. |
