Systemic Risk and Hedge Funds Nicholas Chany, Mila Getmanskyz, Shane M. Haasx, and Andrew W. Loyy This Draft: August 1, 2005 Abstract Systemic risk is commonly used to describe the possibility of a series of correlated defaults
Whether hedge fund returns could be attributed to systematic risk exposures rather than managerial skills is an interesting debate among academics and practitioners. Academic literature suggests that hedge fund performance is mostly determined by alternative betas, which justifies the construction of investable hedge fund clones or replicators.
This thesis aims to identify main driving market risk factors of different strategies implemented by hedge funds by looking at correlation coefficients, implementing Principal Component Analysis and analyzing “loadings” for first three principal components, which explain the largest portion of the variation of hedge funds’ returns.
Stress testing: The multi-factor model can be adapted for risk management purposes, such as testing the likelyimpact of extreme market events on hedge fund strategy returns. 3. Portfolio management:The model can be incor-porated into the portfolio management process for a portfolio of hedge funds. For example, expectations for future strategy ...
The combination of the dynamic allocation of capital resources to a portfolio of trading strategies, each with nonlinear return characteristics, greatly limits the value of analyzing a general sample of many hedge funds. From a modeling perspective, it is useful to concentrate on a specific trading strategy that is identifiable with a ...
Hedge Funds Vikas Agarwal Georgia State University Narayan Y. Naik London Business School 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
All in all, our findings show that hedge fund adjustment dynamics exhibit nonlinearity, persistence, asymmetry and time-variance. They also indicate that ESTR modeling can supplant linear modeling to characterize hedge fund strategy exposure to risk factors, and identify the exposure of hedge funds to risk differently according to regimes. 18.104.22.168.
On the High-Frequency Dynamics of Hedge Fund Risk Exposures ANDREW J. PATTON and TARUN RAMADORAI∗ ABSTRACT We propose a new method to model hedge fund risk exposures using relatively high-frequency conditioning variables. In a large sample of funds, we ﬁnd substantial evidence that hedge fund risk exposures vary across and within months ...
exposed to the risk that his correlation assumption is wrong (correlation risk). In this paper, index tranches’ properties and several hedging strategies are discussed. Next, the model risk and correlation risk are analyzed through the study of the eﬃciency of several factor-based copula models (like the Gaussian, the double-t and
absence of a true modeling of the time-variations in these factor exposures, simple stepwise linear regression techniques, which simply match the average past exposures of hedge fund managers to underlying risk factors, are bound to perform poorly on an out-of-sample basis. • Factor-approach will not work until we develop satisfactory
Tactical Style Allocation for Funds of Hedge Funds Daniel Giamouridis ... downside risk of hedge fund strategies’, 2008, Journal of Futures Markets, forthcoming (with I. Ntoula) ... • Similar issues in hedge fund risk modeling – Vrontos et al. (2008) Hedge Fund return covariance
• Construct portfolios of hedge funds such that the aggregate ABS factor betas are consistent with overall asset allocation. The ABS factor approach helps in understanding the role of hedge funds in a traditional asset allocation framework. Again quoting from Fung : hedge funds deliver “alternative risk premia” for
Risk Management for Hedge Funds: Introduction and Overview Andrew W. Lo Although risk management has been a well-plowed field in financial modeling for more than 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.
Economic motivation Hedge funds data Contagion modeling Empirical analysis The funding liquidity factor Stress-tests Concluding remarks This paper introduces new models to analyze liquidation risk dependence across individual Hedge Funds (HF) The model speciﬁcation focuses on disentangling :
Bali, Brown, and Caglayan (2012) introduce a comprehensive measure of systematic risk for individual hedge funds by breaking up total risk into systematic and residual risk components. They find that systematic variance is a highly significant factor in explaining the dispersion of cross-sectional returns, while at the same time, measures of ...
An Analysis of Hedge Fund Strategies - Abstract This PhD thesis analyses hedge fund strategies in detail by decomposing hedge fund performance figures. Our aim is to present hedge funds, to understand what managers expect to do and to understand how they make or destroy value over time. In
Using data on the monthly returns of hedge funds during the period January 1990 to August 1998, we estimate six‐factor Jensen alphas for individual hedge funds, employing eight different investment styles. ... Dynamic portfolio insurance strategies: risk management under Johnson distributions, Annals of Operations Research, ... Modeling Hedge ...
8I EVCA Risk Measurement Guidelines 2013 Exhibit 1 Prior to the ﬁnancial crisis, HMC contributed as much as USD 1.2 billion per year to Harvard’s budget, accounting for more than one-third of the university’s total annual operating income, nearly equivalent to the contributions from tuition and
At its peak in late 2007, the hedge fund industry had grown to more than $2.8 trillion in assets. As it grew, so did the complexity of hedge fund management. Ongoing innovations, entry into new markets, and creative trading strategies have made it more and more difficult for investors to understand the market behavior of hedge funds.
Factor Modelling and Benchmarking of Hedge Funds: Can Passive Investments in Hedge Fund Strategies Deliver? ... investable benchmarks based on risk factor analysis and replication offers a valid, theoretically more sound, and cheaper alternative to the currently offered hedge fund index products, especially as the latter reveal themselves more ...
than other investments. Hedge strategies and private equity investments are not subject to the same regulatory requirements as registered investment products. Hedge strategies often engage in leveraging and other speculative investment practices that may increase the risk of investment loss.