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Tail risk in hedge funds: A unique view from portfolio holdings

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  • Agarwal, Vikas
  • Ruenzi, Stefan
  • Weigert, Florian

Abstract

We develop a new systematic tail risk measure for equity-oriented hedge funds to examine the impact of tail risk on fund performance and to identify the sources of tail risk. We find that tail risk affects the cross-sectional variation in fund returns and that investments in both tail-sensitive stocks and options drive tail risk. Moreover, leverage and exposure to funding liquidity shocks are important determinants of tail risk. We find evidence of some funds being able to time tail risk exposure prior to the 2008–2009 financial crisis.

Suggested Citation

  • Agarwal, Vikas & Ruenzi, Stefan & Weigert, Florian, 2017. "Tail risk in hedge funds: A unique view from portfolio holdings," Journal of Financial Economics, Elsevier, vol. 125(3), pages 610-636.
    • Handle: RePEc:eee:jfinec:v:125:y:2017:i:3:p:610-636
    DOI: 10.1016/j.jfineco.2017.06.006
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    More about this item

    Keywords

    Hedge funds; Tail risk; Portfolio holdings; Funding liquidity risk; Leverage;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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