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Calculating hedge fund risk: the draw down and the maximum draw down

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  • Alessio Sancetta
  • Steve Satchell

Abstract

Hedge funds, defined in this context as geared financial entities, frequently use some measure of point loss as a risk measure. This paper considers the statistical properties of an uninterrupted fall in a security price; called a draw down. The distribution of the draw downs in an N-trading period is derived together with an approximation to the distribution of the maximum. Complementary results are provided which are useful for risk calculations. A brief empirical study of the S&P futures is included in order to highlight some of the limitations in the presence of extreme events.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

Volume (Year): 11 (2004)
Issue (Month): 3 ()
Pages: 259-282

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Handle: RePEc:taf:apmtfi:v:11:y:2004:i:3:p:259-282

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Related research

Keywords: Characteristic function; Downside risk; KST distribution;

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Cited by:
  1. Caicedo-Llano, Juliana & Dionysopoulos, Thomas, 2008. "Market integration: A risk-budgeting guide for pure alpha investors," Journal of Multinational Financial Management, Elsevier, vol. 18(4), pages 313-327, October.
  2. J-H Steffi Yang, 2004. "The Markovian Dynamics of "Smart Money"," Econometric Society 2004 Far Eastern Meetings 797, Econometric Society.

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