ABC Quant Views On Risk Management And Portfolio Construction

Based on the Markowitz’s mean-variance model, the Capital Asset Pricing Model (CAPM) inherits all the shortcomings of the latter in addition to its own assumptions that makes it hardly applicable for hedge funds and non-linear assets. While the CAPM still emerges as the most commonly used approach for both institutional and private investors, using it for hedge funds could be disastrous.

The Markowitz’s mean-variance methodology is hardly applicable for hedge fund risk assessment. Since its introduction, the mean-variance methodology became the primary tool for portfolio diversification used by the majority of pension and mutual funds globally. However, despite its popularity, the mean-variance approach suffers important drawbacks...

Typical mistakes in hedge fund valuation and risk assessment arise from neglecting their unique properties: non-normal return distributions, low transparency, bizzarre hedge fund indices, inapplicability of the mean-variance methodology, numerous data biases etc. The distinct hedge fund valuation and risk management problems can be outlined as follows...