PORTFOLIO RISK ASSESSMENT

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Inheriting the valuation challenges associated with individual funds and single asset classes, multi-asset investment portfolios, particularly those with a substantial concentration of hedge funds (hedge fund of funds – HFoF), face additional layers of risk.
To start, HFoFs often demonstrate heightened negative skewness and kurtosis in comparison to individual funds or traditional asset classes. As a result, the unsuitability of the mean-variance theory, which assumes a normal distribution, is more pronounced in HFoFs. In simpler terms, relying on standard deviation and its correlated risk metrics to evaluate market risk may lead to either an overestimation or underestimation of actual risk levels due to the non-normal distribution observed in hedge funds.
Additionally, the diversification of portfolio constituents results in a stronger correlation with major markets when contrasted with individual funds. Consequently, the augmentation of a portfolio's asset count does not necessarily enhance its diversification and market neutrality.
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