Skewness is the standardized third central moment of a random variable. It provides an indication of how symmetric or asymmetric the distribution of a random variable is. A random variables with negative skewness, or skew, is more likely to produce values that are far below the mean than far above.
Mathematically, for a random variable X with mean μ and standard deviation σ, skewness is defined as:
Many securities exhibit negative skewness, meaning extreme negative returns are more likely than extreme positive returns. All other things being equal, investors tend to dislike investments with more negative skewness. Certain hedge fund strategies can exacerbate negative skewness. Hedge fund managers can use risk management to reduce negative skewness.