Fat tail = positive Kurtosis

CFA Level I
#1

Am i correct?

Autually I’m thinkg why Hedge fund has positve kurtosis tendency…

#2

Typically, yes.

#3

Thanks s2000! Positive Kurtosis means the average possiblity will be higher than normality as well as fat tail.

I understand HF will have fat tail, but don’t understand why it’s average possibility will be higher than normal distribution.

Could you please advise? Many thanks.

#4

Just to clarify - its positive EXCESS kurtosis. By mathematics kurtosis of a normal distribution will be 3. If kurtosis is 7 then the distribution has positive EXCESS kurtosis of 4 and thus the distribution is leptokurtic.

Not sure what you mean by “average possibility will be higher than normal.” Leptokurtic distributions will have “more area in the tails” than a normal distribution. Therefore there is a greater probability of realizing an event that is further from the mean than you would in a normal distribution.

Hope this makes sense.

#5

Yes, positive excess kurtosis.

Positive excess kurtosis means more in the tails and more near the mean. Less in the midrange.

#6

Thanks S2000!!

Question: Why hedge funds have “more near the mean” return distribution?