Measuring Loss Potential of Hedge Fund Strategies
AbstractWe measure the loss potential of Hedge Funds by combining three market risk measures: VaR, Draw-Down and Time Under-The-Water. Calculations are carried out considering three different frameworks regarding Hedge Fund returns: i) Normality and time-independence, ii) Non-normality and time- independence and iii) Non-normality and time-dependence. In the case of Hedge Funds, our results clearly state that market risk may be substantially underestimated by those models which assume Normality or, even considering Non-Normality, neglect to model time- dependence. Moreover, VaR is an incomplete measure of market risk whenever the Normality assumption does not hold. In this case, VaR results must be compared with Draw-Down and Time Under-The-Water measures in order to accurately assess about Hedge Funds loss potential.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0503010.
Length: 25 pages
Date of creation: 10 Mar 2005
Date of revision:
Note: Type of Document - pdf; pages: 25. Journal of Alternative Investments, Vol. 7, No. 1, pp. 7-31, Summer 2004
Contact details of provider:
Web page: http://188.8.131.52
Hedge Fund; Value-at-Risk; risk; performance; drawdown; under- the-water; normal returns; non-normal returns; time-dependence; ARMA; Monte Carlo; skewness; kurtosis; mixture of gaussian distributions; survival probability; styles; investment strategies;
Find related papers by JEL classification:
- G0 - Financial Economics - - General
- G1 - Financial Economics - - General Financial Markets
- G2 - Financial Economics - - Financial Institutions and Services
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-04-16 (All new papers)
- NEP-FIN-2005-04-16 (Finance)
- NEP-MAC-2005-04-16 (Macroeconomics)
- NEP-RMG-2005-04-16 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gaurav Amin & Harry. M Kat, 2002. "Generalization of the Sharpe Ratio and the Arbitrage-Free Pricing of Higher Moments," ICMA Centre Discussion Papers in Finance icma-dp2002-15, Henley Business School, Reading University.
- Sevinc Cukurova & Jose M. Marin, 2011. "On the economics of hedge fund drawdown status: Performance, insurance selling and darwinian selection," Working Papers 2011-04, Instituto Madrileño de Estudios Avanzados (IMDEA) Ciencias Sociales.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If references are entirely missing, you can add them using this form.