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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 tail risk measure for 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 investments in both, tailsensitive stocks as well as options, drive tail risk. Moreover, managerial incentives and discretion as well as exposure to funding liquidity shocks are important determinants of tail risk. We find evidence that is consistent with funds being able to time tail risk exposure prior to the recent financial crisis.

Suggested Citation

  • Agarwal, Vikas & Ruenzi, Stefan & Weigert, Florian, 2015. "Tail risk in hedge funds: A unique view from portfolio holdings," CFR Working Papers 15-07, University of Cologne, Centre for Financial Research (CFR).
    • Handle: RePEc:zbw:cfrwps:1507
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    More about this item

    Keywords

    Hedge Funds; Tail Risk; Portfolio Holdings; Funding Liquidity Risk;
    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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    This paper has been announced in the following NEP Reports:

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