@article {Cremers70, author = {Jan-Hein Cremers and Mark Kritzman and S{\'e}bastien Page}, title = {Optimal Hedge Fund Allocations}, volume = {31}, number = {3}, pages = {70--81}, year = {2005}, doi = {10.3905/jpm.2005.500356}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Hedge funds have return peculiarities not commonly associated with traditional investment vehicles. They are more inclined to produce return distributions with significantly non{\textendash}normal skewness and kurtosis. Investor preferences may be better represented by bilinear utility functions or S{\textendash}shaped value functions than by neoclassical utility functions, and mean{\textendash}variance optimization is thus not appropriate for forming portfolios that include hedge funds. Portfolios of hedge funds formed using both mean{\textendash}variance and full{\textendash}scale optimization, given a wide range of assumptions about investor preferences, reveal that higher moments of hedge funds do not meaningfully compromise the efficacy of mean{\textendash}variance optimization if investors have power utility; mean{\textendash}variance optimization is not particularly effective for identifying optimal hedge fund allocations if preferences are bilinear or S{\textendash}shaped; and, contrary to conventional wisdom, investors with S{\textendash}shaped preferences are attracted to kurtosis as well as negative skewness.}, issn = {0095-4918}, URL = {https://jpm.pm-research.com/content/31/3/70}, eprint = {https://jpm.pm-research.com/content/31/3/70.full.pdf}, journal = {The Journal of Portfolio Management} }