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Market Risk Related Scholarly Compositions
See also:
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Related News,
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Books,
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Assessing Market Risk for Hedge
Funds and Hedge Funds Portfolios
by Francois
Serge Lhabitant
March, 2001
Abstract
We suggest an empirical model to analyze the investment style of
individual hedge funds and funds of funds. Our approach is based
on a mixture of the style analysis approach suggested by Sharpe
(1988), the factor push approach used in stress testing, and
historical simulation. An interesting and straightforward
extension of this model is the estimation of value-at-risk (VaR)
figures...
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Easily Implemented Confidence Intervals and Hypothesis Tests for
Sharpe Ratios Under General Conditions
by J.D. Opdyke
DataMineIt
2006
Abstract
Until recently, since Jobson & Korkie (1981) derivations
of the asymptotic distribution of the Sharpe ratio that are
practically useable for generating confidence intervals or for
conducting one- and two-sample hypothesis tests have relied on
the restrictive, and now widely refuted, assumption of normally
distributed returns. This paper presents an easily implemented
formula for the asymptotic distribution that is valid under very
general conditions – stationary and ergodic returns – thus
permitting time-varying conditional volatilities, serial
correlation, and other non-iid returns behavior. It is
consistent with that of Christie (2005), but it is more
mathematically tractable and intuitive, and simple enough to be
used in a spreadsheet. Also generalized beyond the normality
assumption is the small sample bias adjustment presented in
Christie (2005). A thorough simulation study examines the finite
sample behavior of the derived one- and two-sample estimators
under the realistic returns conditions of concurrent
leptokurtosis, asymmetry, and importantly (for the two-sample
estimator), strong positive correlation between funds, the
effects of which have been overlooked in previous studies. The
two-sample statistic exhibits reasonable level control and power
under these real world conditions. This makes its application to
the ubiquitous Sharpe ratio rankings of mutual funds very
useful, since the implicit pairwise comparisons in these
orderings have little inferential value on their own. Using
actual returns data from forty mutual funds, the statistic
yields statistically significant results for many such pairwise
comparisons of the ranked funds. It should be useful for other
purposes as well, wherever Sharpe ratios are used in performance
assessment.
JEL: C10, C12, C13, G10, G11 Keywords: performance, risk,
portfolio, mutual fund, asymmetry, heavy tails
View composition on SSRN
View composition on DataMineIt.com
See
Also:
SAS Program for generating Fund rankings
with p-values, as derived in paper
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Hedge Funds Investing: A
Quantitative Look Inside the Black Box
by François-Serge Lhabitant
August 2001
Abstract
There is an increasing amount of evidence that shows
the benefits of considering hedge funds as an asset class at the
strategic asset allocation level. The investors’ greatest
challenge remains the identification of desirable investment
vehicles, since very little formal quantitative analysis of
hedge funds has been done in the past. In this paper, we suggest
an innovative approach to hedge fund investing, which is valid
at the individual fund level as well as at the aggregate
portfolio level (e.g. portfolio of hedge funds)...
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Market Risk with Interdependent Choice
by Stephen
Morris & Hyun Song Shin
Yale University & Oxford University
May, 2000
Abstract
Risks faced by traders from price movements are sometimes
magnified by the
actions of other traders. Risk management systems which neglect
this feature may give a seriously misleading picture of the true
risks. The hazards arising from this potential blindspot are at
their most dangerous when the prevailing conventional wisdom
lulls traders into a false sense of security on the
attractivenss of a trading position...
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Modeling Liquidity Risk, With Implications for
Traditional Market Risk Measurement and Management
by Anil
Bangia, Til Schuermann, & John D. Stroughair
The Wharton Financial Institutions Center
December 21, 1998
Abstract
Market risk management under normal conditions traditionally has
focussed on the distribution of portfolio value changes
resulting from moves in the mid-price. Hence the market risk is
really in a “pure” form: risk in an idealized market with no
“friction” in obtaining the fair price. However, many markets
possess an additional liquidity component that arises from a
trader not realizing the mid-price when liquidating her
position, but rather the mid-price minus the bid-ask spread...
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On the Performance of Hedge Funds
by B. Liang
Weatherhead School of Management
Case Western Reserve University
May, 1998
Abstract
This paper investigates hedge fund performance and risk. The
empirical evidence indicates that hedge funds differ
substantially from traditional investment vehicles such as
mutual funds. The funds with watermarks significantly outperform
the funds without watermarks. The average hedge fund returns are
related positively to incentive fees, the size of the fund, and
the lockup period. Hedge funds follow dynamic trading strategies
and have low systematic risk. There are low correlations among
different strategies. Compared with mutual funds, hedge funds
offer better risk-return trade-offs: they have higher Sharpe
ratios, lower mrket risks, and higher abnormal returns. In the
period of January 1994 to December 1996, most hedge funds
provide positive abnormal returns. Overall, hedge fund
strategies dominate mutual fund strategies, hence hedge funds
provide a more efficient investment opportunity set for
investors.
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On Taking the ‘Alternative' Route: Risks, Rewards
and Performance Persistence of Hedge Funds
by Vikas
Agarwal & Narayan Y. Naik
London Business School & Georgia State University
November, 1999
Abstract
This paper provides a comprehensive analysis of the risk-return
characteristics, risk exposures, and performance persistence of
various hedge fund strategies using a database on hedge fund
indices and individual hedge fund managers. In a mean-variance
framework, we find that a combination of alternative investments
and passive indexing provides significantly better risk-return
tradeoff than passively investing in the different asset
classes. Using a broad asset class factor model, we find that
the hedge fund strategies outperform the benchmark by a range of
6% to 15% per year...
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The Performance of Hedge Funds:
Risk, Return and Incentives
by Carl Ackermann, Richard McEnally, and David Ravenscraft
October, 1998
Abstract
Hedge funds display several interesting characteristics
that may influence performance. These include flexible
investment strategies, strong managerial incentives, substantial
managerial investment, sophisticated investors, and limited
government oversight. Using a large sample of hedge fund data
from 1988-1995, we find that hedge funds consistently outperform
mutual funds, but not standard market indices...
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A primer on hedge funds
by William
Fung & David A. Hsieh
June, 1999
Abstract
In this paper, we provide a rationale for how hedge funds are
organized and some insight on how hedge fund performance differs
from traditional mutual funds. Statistical differences among
hedge fund styles are used to supplement qualitative differences
in the way hedge fund strategies are described. Risk factors
associated with different trading styles are discussed...
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The Risk in Fixed-Income Hedge
Fund Styles
by William Fung & David A. Hsieh
August, 2002
Abstract
This paper studies the risk in fixed-income hedge fund
styles. Principal component analysis is applied to groups of
fixed-income hedge funds to extract common sources of risk and
return. These common sources of risk are related to market risk
factors, such as changes in interest rate spreads and options on
interest rate spreads...
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The Risk in Hedge Fund
Strategies: Theory & Evidence from Trend Followers
by William Fung & David A. Hsieh
PI Asset Management, LLC & Duke University
2001
Abstract
Hedge fund strategies typically generate option-like
returns. Linear-factor models using benchmark asset indices have
difficulty explaining them. Following the suggestions in Glosten
and Jagannarthan (1994), this article shows how to model hedge
fund returns by focusing on the popular "trend-following"
strategy...
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Risk Management for Hedge Funds:
Introduction and Overview
by Andrew W. Lo
Massachusetts Institute of Technology (MIT) - Sloan School of
Management; National Bureau of Economic Research (NBER)
June 7, 2001
Abstract
Although risk management has been a well-ploughed field
in financial modeling for over two decades, traditional risk
management tools such as mean-variance analysis, beta, and
Value-at-Risk do not capture many of the risk exposures of
hedge-fund investments. In this article, I review several
aspects of risk management that are unique to hedge funds -
survivorship bias, dynamic risk analytics, liquidity, and
nonlinearities - and provide examples that illustrate their
potential importance to hedge-fund managers and investors. I
propose a research agenda for developing a new set of risk
analytics specifically designed for hedge-fund investments, with
the ultimate goal of creating risk transparency while, at the
same time, protecting the proprietary nature of hedge-fund
investment strategies...
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Risks and Portfolio Decisions
Involving Hedge Funds
by Vikas
Agarwal & Narayan Y. Naik
London Business School & Georgia State University
2004
Abstract
This article characterizes the systematic risk exposures of
hedge funds using buy-and-hold and option-based strategies. Our
results show that a large number of equity-oriented hedge fund
strategies exhibit payoffs resembling a short position in a put
option on the market index and therefore bear significant
left-tail risk, risk that is ignored by the commonly used
mean-variance framework. Using a mean-conditional value-at-risk
framework, we demonstrate the extent to which the mean-variance
framework underestimates the tail risk...
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The Statistical Properties of
Hedge Fund Index Returns and their Implications for Investors
by Chris Brooks & Harry M. Kat
ISMA Centre
November 10, 2001
Abstract
The monthly return distributions of many hedge fund
indices exhibit highly unusual skewness and kurtosis properties
as well as first-order serial correlation. This has important
consequences for investors. We demonstrate that although hedge
fund indices are highly attractive in mean-variance terms, this
is much less the case when skewness, kurtosis, and
autocorrelation are taken into account. Sharpe Ratios will
substantially overestimate the true risk-return performance of
(portfolios containing) hedge funds. Similarly, mean-variance
portfolio analysis will over-allocate to hedge funds and
overestimate the attainable benefits from including hedge funds
in an investment portfolio. We also find substantial differences
between indices that aim to cover the same type of strategy.
Investors' perceptions of hedge fund performance and value added
will therefore strongly depend on the indices used.
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Back to Scholarly Compositions
See also:
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Related News,
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| HEDGE FUND RISK AND OTHER
DISCLOSURES |
Hedge funds, including fund of funds (“Hedge
Funds”), are unregistered private investment partnerships, funds or
pools that may invest and trade in many different markets,
strategies and instruments (including securities, non-securities and
derivatives) and are NOT subject to the same regulatory requirements
as mutual funds, including mutual fund requirements to provide
certain periodic and standardized pricing and valuation information
to investors. There are substantial risks in investing in Hedge
Funds. Persons interested in investing in Hedge Funds should
carefully note the following:
- Hedge Funds represent speculative investments and involve a
high degree of risk. An investor could lose all or a substantial
portion of his/her investment. Investors must have the financial
ability, sophistication/experience and willingness to bear the
risks of an investment in a Hedge Fund.
- An investment in a Hedge Fund should be discretionary capital
set aside strictly for speculative purposes.
- An investment in a Hedge Fund is not suitable or desirable for
all investors. Only qualified eligible investors may invest in
Hedge Funds.
- Hedge Fund offering documents are not reviewed or approved by
federal or state regulators
- Hedge Funds may be leveraged (including highly leveraged) and
a Hedge Fund’s performance may be volatile
- An investment in a Hedge Fund may be illiquid and there may be
significant restrictions on transferring interests in a Hedge
Fund. There is no secondary market for an investor’s investment in
a Hedge Fund and none is expected to develop.
- A Hedge Fund may have little or no operating history or
performance and may use hypothetical or pro forma performance
which may not reflect actual trading done by the manager or
advisor and should be reviewed carefully. Investors should not
place undue reliance on hypothetical or pro forma performance.
- A Hedge Fund’s manager or advisor has total trading authority
over the Hedge Fund.
- A Hedge Fund may use a single advisor or employ a single
strategy, which could mean a lack of diversification and higher
risk.
- A Hedge Fund (for example, a fund of funds) and its managers
or advisors may rely on the trading expertise and experience of
third-party managers or advisors, the identity of which may not be
disclosed to investors
- A Hedge Fund may involve a complex tax structure, which should
be reviewed carefully.
- A Hedge Fund may involve structures or strategies that may
cause delays in important tax information being sent to investors.
- A Hedge Fund may provide no transparency regarding its
underlying investments (including sub-funds in a fund of funds
structure) to investors. If this is the case, there will be no way
for an investor to monitor the specific investments made by the
Hedge Fund or, in a fund of funds structure, to know whether the
sub-fund investments are consistent with the Hedge Fund’s
investment strategy or risk levels.
- A Hedge Fund may execute a substantial portion of trades on
foreign exchanges or over-the-counter markets, which could mean
higher risk.
- A Hedge Fund’s fees and expenses-which may be substantial
regardless of any positive return- will offset the Hedge Fund’s
trading profits. In a fund of funds or similar structure, fees are
generally charged at the fund as well as the sub-fund levels;
therefore fees charged investors will be higher that those charged
if the investor invested directly in the sub-fund(s).
- Hedge Funds are not required to provide periodic pricing or
valuation information to investors.
- Hedge Funds and their managers/advisors may be subject to
various conflicts of interest.
The above general
summary is not a complete list of the risks and other important
disclosures involved in investing in Hedge Funds and, with respect
to any particular Hedge Fund, is subject to the more complete and
specific disclosures contained in such Hedge Fund’s respective
offering documents. Before making any investment, an investor should
thoroughly review a Hedge Fund’s offering documents with the
investor’s financial, legal and tax advisor to determine whether an
investment in the Hedge Fund is suitable for the investor in light
of the investor’s investment objectives, financial circumstances and
tax situation.
All performance information is believed
to be net of applicable fees unless otherwise specifically noted. No
representation is made that any fund will or is likely to achieve
its objectives or that any investor will or is likely to achieve
results comparable to those shown or will make any profit at all or
will be able to avoid incurring substantial losses. Past performance
is not necessarily indicative, and is no guarantee, of future
results.
The information on the Site is intended for
informational, educational and research purposes only. Nothing on
this Site is intended to be, nor should it be construed or used as,
financial, legal, tax or investment advice, be an opinion of the
appropriateness or suitability of an investment, or intended to be
an offer, or the solicitation of any offer, to buy or sell any
security or an endorsement or inducement to invest with any fund or
fund manager. No such offer or solicitation may be made prior to the
delivery of appropriate offering documents to qualified investors.
Before making any investment, you should thoroughly review the
particular fund’s confidential offering documents with your
financial, legal and tax advisor and conduct such due diligence as
you (and they) deem appropriate. We do not provide investment advice
and no information or material on the Site is to be relied upon for
the purpose of making investment or other decisions. Accordingly, we
assume no responsibility or liability for a ny investment decisions
or advice, treatment, or services rendered by any investor or any
person or entity mentioned, featured on or linked to the Site.
The information on this Site is as of the date(s) indicated,
is not a complete description of any fund, and is subject to the
more complete disclosures and terms and conditions contained in a
particular fund's offering documents, which may be obtained directly
from the fund. Certain of the information, including investment
returns, valuations, fund targets and strategies, has been supplied
by the funds or their agents, and other third parties, and although
believed to be reliable, has not been independently verified and its
completeness and accuracy cannot be guaranteed. No warranty, express
or implied, representation or guarantee is made as to the accuracy,
validity, timeliness, completeness or suitability of this
information.
Any indices and other financial benchmarks
shown are provided for illustrative purposes only, are unmanaged,
reflect reinvestment of income and dividends and do not reflect the
impact of advisory fees. Investors cannot invest directly in an
index. Comparisons to indexes have limitations because indexes have
volatility and other material characteristics that may differ from a
particular hedge fund. For example, a hedge fund may typically hold
substantially fewer securities than are contained in an index.
Indices also may contain securities or types of securities that are
not comparable to those traded by a hedge fund. Therefore, a hedge
fund’s performance may differ substantially from the performance of
an index. Because of these differences, indexes should not be relied
upon as an accurate measure of comparison.
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