Hedge Fund Risk - Part I Skew

An investor in a hedge fund normally wants to look at its risk.

Typical risk measures don't always work well with hedge funds which may exhibit behaviors more statistically extreme than other types of investment. Extreme behavior is often called behavior at the "tails". (This will be explained in more detail below and in later blogs).

One item that is examined to measure hedge fund risk at the tails (or extremes) is "skew".

A distribution is skewed if one of its tails is longer than the other. If you click on the chart below it should pop up for you.

The green distribution shown has a positive skew. This means that it has a long tail in the positive direction. The red distribution has a negative skew since it has a long tail in the negative direction. Finally, the blue distribution is symmetric and has no skew. Distributions with positive skew are sometimes called "skewed to the right" whereas distributions with negative skew are called "skewed to the left."

So, as a "tool" only,  it would be a positive indicator if a fund behaved with returns showing a positive skew, neutral if a fund behaved with a neutral skew, and a negative if a fund behaved with a negative skew.

Of course, a fund does not always behave going forward in the same manner as the past - so that is certainly a caveat. Also I must put in my usual disclaimer that I am not an investment adviser.

Coming soon in this blog:  "kurtosis".