Hedge Funds Exposed: Risk Higher Than Assumed Due to Non-Normal Distributions
Many hedge funds have return distributions that are not normal due to various factors like derivatives and short sales. This can lead to higher exposure to losses than expected. A study used simulation techniques to show that the assumption of normality can underestimate the risk of loss for 31 hedge fund return series. The errors in risk exposure were measured for both end-of-horizon and within-horizon probabilities of loss.