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Measuring risk in the hedge fund sector

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  • Tobias Adrian

Abstract

Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998. A comparison of the current rise in correlations with the elevation before the 1998 event, however, reveals a key difference. The current increase stems mainly from a decline in the volatility of returns, while the earlier rise was driven by high covariances - an alternative measure of comovement in dollar terms. Because volatility and covariances are lower today, the current hedge fund environment differs from the 1998 environment.>

Suggested Citation

  • Tobias Adrian, 2007. "Measuring risk in the hedge fund sector," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 13(Mar).
    • Handle: RePEc:fip:fednci:y:2007:i:mar:n:v.13no.3
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    Citations

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    Cited by:

    1. John Kambhu & Til Schuermann & Kevin J. Stiroh, 2007. "Hedge funds, financial intermediation, and systemic risk," Economic Policy Review, Federal Reserve Bank of New York, vol. 13(Dec), pages 1-18.
    2. Patrick M McGuire & Kostas Tsatsaronis, 2008. "Estimating hedge fund leverage," BIS Working Papers 260, Bank for International Settlements.
    3. repec:fip:feddop:1 is not listed on IDEAS
    4. Christian Manicaro & Joseph Falzon, 2017. "Hedge funds risk and connectedness," Journal of Asset Management, Palgrave Macmillan, vol. 18(4), pages 295-316, July.
    5. Mark D. Flood & Phillip Monin & Lina Bandyopadhyay, 2015. "Gauging Form PF: Data Tolerances in Regulatory Reporting on Hedge Fund Risk Exposures," Working Papers 15-13, Office of Financial Research, US Department of the Treasury.
    6. Monica Billio & Mila Getmansky & Loriana Pelizzon, 2008. "Crises and Hedge Fund Risk," Yale School of Management Working Papers amz2561, Yale School of Management, revised 01 Oct 2009.
    7. Tobias Adrian & Markus K. Brunnermeier, 2016. "CoVaR," American Economic Review, American Economic Association, vol. 106(7), pages 1705-1741, July.
      • Tobias Adrian & Markus K. Brunnermeier, 2008. "CoVaR," Staff Reports 348, Federal Reserve Bank of New York.
      • Tobias Adrian & Markus K. Brunnermeier, 2011. "CoVaR," NBER Working Papers 17454, National Bureau of Economic Research, Inc.
    8. Libin Yang & William Rea & Alethea Rea, 2015. "How much diversification potential is there in a single market? Evidence from the Australian Stock Exchange," Papers 1512.06486, arXiv.org.
    9. Uppal, Raman & Buss, Adrian & Vilkov, Grigory, 2017. "Financial Innovation and Asset Prices," CEPR Discussion Papers 12416, C.E.P.R. Discussion Papers.
    10. Frank Hespeler & Giuseppe Loiacono, 2017. "Monitoring systemic risk in the hedge fund sector," Quantitative Finance, Taylor & Francis Journals, vol. 17(12), pages 1859-1883, December.
    11. Christian Calmès & Raymond Théoret, 2012. "Bank systemic risk and the business cycle: Canadian and U.S. evidence," RePAd Working Paper Series UQO-DSA-wp022012, Département des sciences administratives, UQO.
    12. Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2010. "Econometric Measures of Systemic Risk in the Finance and Insurance Sectors," NBER Working Papers 16223, National Bureau of Economic Research, Inc.
    13. Lu Li & Yang Li & Xueding Wang & Tusheng Xiao, 2020. "Structural holes and hedge fund return comovement: evidence from network‐connected stock hedge funds in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2811-2841, September.
    14. Bussière, Matthieu & Hoerova, Marie & Klaus, Benjamin, 2015. "Commonality in hedge fund returns: Driving factors and implications," Journal of Banking & Finance, Elsevier, vol. 54(C), pages 266-280.
    15. Libin Yang & William Rea & Alethea Rea, 2017. "Impending Doom: The Loss of Diversification before a Crisis," IJFS, MDPI, vol. 5(4), pages 1-13, November.
    16. Laurence Fung & Chi-sang Tam & Ip-wing Yu, 2008. "Changes in Investors' Risk Appetite - An Assessment of Financial Integration and Interdependence," Working Papers 0812, Hong Kong Monetary Authority.
    17. Andrew W. Lo & Mila Getmansky & Peter A. Lee, 2015. "Hedge Funds: A Dynamic Industry in Transition," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 483-577, December.
    18. Prelipcean, Gabriela & Boscoianu, Mircea, 2020. "An Innovative Flexible Investment Vehicle Oriented to Sustainability – The Adaptation of Hedge Funds in the Case of Emerging Markets," Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference (2020), Virtual Conference, in: Proceedings of the ENTRENOVA - ENTerprise REsearch InNOVAtion Conference, Virtual Conference, 10-12 September 2020, pages 493-503, IRENET - Society for Advancing Innovation and Research in Economy, Zagreb.
    19. Savona, Roberto, 2014. "Hedge fund systemic risk signals," European Journal of Operational Research, Elsevier, vol. 236(1), pages 282-291.
    20. Christian Calmès & Raymond Théoret, 2011. "Bank systemic risk and the business cycle: An empirical investigation using Canadian data," RePAd Working Paper Series UQO-DSA-wp322011, Département des sciences administratives, UQO.
    21. Loriana Pelizzon & Monica Billio & Mila Getmansky, 2008. "Crisis and Hedge Fund Risk," Working Papers 2008_10, Department of Economics, University of Venice "Ca' Foscari".
    22. Cobb, Marcus P A, 2017. "Forecasting Economic Aggregates Using Dynamic Component Grouping," MPRA Paper 81585, University Library of Munich, Germany.
    23. Jiaqi Chen & Michael Tindall, 2012. "Hedge fund dynamic market sensitivity," Occasional Papers 12-1, Federal Reserve Bank of Dallas.
    24. Li, Lu & Li, Yang & Wang, Xueding & He, Yuqian, 2021. "Limited attention, managerial multitasking, and hedge fund performance in China," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    25. Racicot, François-Éric & Théoret, Raymond, 2016. "Macroeconomic shocks, forward-looking dynamics, and the behavior of hedge funds," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 41-61.

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