Traditional and Alternative Risk

alternative investments. Instrumental to this design, we introduce a specific metric
for assessing hedge fund performance, comprising both the relative advantage and
the extra-risk of an alternative investment over a traditional one. We are concerned
with the impact of the crisis. Common wisdom tells us that during phases of market
euphoria, investors’ wishful thinking can make them overconfident of the high returns
promised by the leveraged structures and the aggressive investment policies typical
of this asset class; conversely, when the downturns hit, the “big bets”, taken by
hedge fund managers, in risky and illiquid investments, can trigger severe losses in
their investors’ portfolios. We found evidence that regime switches in stock returns
emphasise the performance gap among the different fund investment policies;
furthermore, some styles can effectively capitalise on managerial skill, outperforming
traditional equity investment in terms of adjusted performance.