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Are hedge funds an attractive investment opportunity for a Norwegian private investor?

Kvistad, Anders Norheim; Thorne, Wilhelm Elias Monclair
Master thesis
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Masterthesis.pdf (12.36Mb)
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http://hdl.handle.net/11250/221029
Utgivelsesdato
2014
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  • Master Thesis [3384]
Sammendrag
A recent Norwegian legislative proposal, likely to become law in 2014, suggests that hedge

funds should be able to approach non-professional, private investors. In light of this, the

objective of our thesis is to examine if hedge funds are an attractive investment opportunity

for a Norwegian private investor. By defining two sub-questions, we use empirical research

and relevant academic literature to study several aspects of hedge funds. Based on the Sharpe

ratio and the Modified Sharpe ratio, we find support for hedge funds providing an attractive

risk/reward relationship. However, these performance evaluations are insufficient due to the

illiquidity of hedge funds, the leverage risks, and the returns biases. As the efficient frontiers

of stocks and bonds improve when hedge funds are included, one can argue that hedge funds

provide unique returns. However, the non-normality, skewness, and kurtosis may distort the

efficient frontiers. In addition, the calculated correlations between hedge funds and traditional

assets, as well as the similarities between the payoff structure of hedge funds and short put

options, indicate that hedge funds are not providing unique exposure. In total, our

recommendation for Norwegian private investors is to be cautious with regards to investing

in hedge funds. This is due to the fact that the performance of hedge funds may be distorted,

the risk management features may be lower than expected, and hedge funds will likely be an

expensive way of obtaining an unattractive payoff structure.

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