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Risk Measures for Autocorrelated Hedge Fund Returns

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  • Antonio Di Cesare

    (Bank of Italy)

  • Philip A. Stork

    (VU University Amsterdam)

  • Casper G. de Vries

    (Erasmus University Rotterdam)

Abstract

Standard risk metrics tend to underestimate the true risks of hedge funds becauseof serial correlation in the reported returns. Getmansky et al. (2004) derive mean,variance, Sharpe ratio, and beta formulae adjusted for serial correlation. Followingtheir lead, adjusted downside and global measures of individual and systemic risksare derived. We distinguish between normally and fat tailed distributed returnsand show that adjustment is particularly relevant for downside risk measures in thecase of fat tails. A hedge fund case study reveals that the unadjusted risk measuresconsiderably underestimate the true extent of individual and systemic risks.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-084/2/DSF 23.

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Date of creation: 26 May 2011
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Handle: RePEc:dgr:uvatin:20110084

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Web page: http://www.tinbergen.nl

Related research

Keywords: Hedge funds; Serial correlation; Systemic risk; VaR; Pareto distribution.;

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  1. P. Hartmann & S. Straetmans & C. G. de Vries, 2004. "Asset Market Linkages in Crisis Periods," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 313-326, February.
  2. Getmansky, Mila & Lo, Andrew W. & Makarov, Igor, 2004. "An econometric model of serial correlation and illiquidity in hedge fund returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 74(3), pages 529-609, December.
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  7. Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
  8. Ross, Stephen A & Zisler, Randall C, 1991. "Risk and Return in Real Estate," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 4(2), pages 175-90, June.
  9. Casper G. de Vries & Bjørn N. Jorgensen & Sarma Mandira & Jon Danielsson, 2005. "Comparing Downside Risk Measures for Heavy Tailed Distributions," FMG Discussion Papers, Financial Markets Group dp551, Financial Markets Group.
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  16. Fung, William & Hsieh, David A & Naik, Narayan & Ramadorai, Tarun, 2006. "Hedge Funds: Performance, Risk and Capital Formation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5565, C.E.P.R. Discussion Papers.
  17. Carl Ackermann & Richard McEnally & David Ravenscraft, 1999. "The Performance of Hedge Funds: Risk, Return, and Incentives," Journal of Finance, American Finance Association, American Finance Association, vol. 54(3), pages 833-874, 06.
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  19. Daníelsson, Jón & Jorgensen, Bjørn N. & Samorodnitsky, Gennady & Sarma, Mandira & de Vries, Casper G., 2013. "Fat tails, VaR and subadditivity," Journal of Econometrics, Elsevier, Elsevier, vol. 172(2), pages 283-291.
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