Abstract
Diversification and low correlation are the primary reasons institutional investors cite for choosing to include hedge funds in a portfolio. However, there are a number of hidden biases in the reported returns which may overstate the attractiveness of hedge funds as an asset class. We review the literature on the stale pricing bias in hedge fund returns, propose an improved model for assessing the existence and extent of the stale pricing bias, and discuss potential causes of the pricing bias. We show how correcting hedge fund returns for stale pricing has a meaningful impact on the estimated volatility and correlation with other asset classes. From this, we demonstrate the degree to which asset allocation decisions relying on standard mean-variance optimization will mis-allocate to hedge funds when the stale pricing bias is not corrected.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
