Portfolio allocation with hedge funds: Case study of a Swiss institutional investor

Asset allocation advisers usually use the mean-variance framework to show the benefits of investing in hedge funds. The authors prove that this is not optimal when the assets are not normally distributed and develop a method based on a modified Value-at-Risk for non-normally distributed assets. We take the example of a Swiss pension fund investing part of its wealth in hedge funds and show that computing a portfolio with mean and variance considerably underestimates the risk of the portfolio.