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Hedge Fund Managed Futures

Skewness as a Hidden Driver of Anomaly Returns

alphaarchitect

1 month ago

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Behavioral finance research has established that investors dislike negative skewness because it exposes them to rare but severe losses, while they embrace positive skewness because it offers the chance of occasional outsized gains — the lottery-like appeal that persists even when expected payoffs are modest. In behavioral models, this preference for positively skewed assets bids up their prices, depressing future expected returns. Conversely, negatively skewed assets must offer higher expected r...

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