Abstract

AbstractLo (2001) surveys the literature on risk management for hedge funds, and recommends a dynamic and transparent risk measurement for the evolutionary hedge fund industry by citing Albert Einstein's comments. This study is to explore the feasibility and advantages of adopting a dynamic absolute‐deviation risk measurement in hedge fund management. It does not only provide an optimal asset allocation strategy both analytically and numerically in a dynamic mean‐absolute deviation (DMAD) setting for hedge fund managers, but also contributes to mitigation of potential investment myopia problems in their risk‐taking behaviors. It sheds light on risk management and investor‐fund manager agency conflicts in the hedge fund industry and adds to the literature on portfolio selection and optimal asset allocation.

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