“Hedge fund returns are non-normal and often exhibit excess kurtosis, meaning that the probability of extreme returns is higher than depicted by a normal distribution. Alternative risk premia such as credit or volatility risk are prime examples of exposures that contribute to this profile. They only tend to incur significant downside losses during certain ‘stress’ events. At other times they may exhibit high risk adjusted returns. It is crucial that these alternative beta extreme risks are understood and managed appropriately. To do this, an investment process must truly appreciate the full distribution of returns (that is capture skew/kurtosis) to capture any extreme events and investigate risks that potentially haven’t been realised in historic returns”

Richard Tomlinson, writing in Hedge Fund Review April 2007
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