| dc.description.abstract | 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. | nb_NO |
