IDEAS home Printed from https://ideas.repec.org/a/bla/eufman/v13y2007i2p333-370.html
   My bibliography  Save this article

Risk Measures for Hedge Funds: a Cross-sectional Approach

Author

Listed:
  • Bing Liang
  • Hyuna Park

Abstract

"This paper analyses the risk-return trade-off in the hedge fund industry. We compare semi-deviation, value-at-risk (VaR), Expected Shortfall (ES) and Tail Risk (TR) with standard deviation at the individual fund level as well as the portfolio level. Using the""Fama and French (1992)""methodology and the combined live and defunct hedge fund data from TASS, we find that the left-tail risk captured by Expected Shortfall (ES) and Tail Risk (TR) explains the cross-sectional variation in hedge fund returns very well, while the other risk measures provide statistically insignificant or marginally significant results. During the period between January 1995 and December 2004, hedge funds with high ES outperform those with low ES by an annual return difference of 7%. We provide empirical evidence on the theoretical argument by""Artzner et al. (1999)""that ES is superior to VaR as a downside risk measure. We also find the""Cornish-Fisher (1937)""expansion is superior to the nonparametric method in estimating ES and TR." Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

Suggested Citation

  • Bing Liang & Hyuna Park, 2007. "Risk Measures for Hedge Funds: a Cross-sectional Approach," European Financial Management, European Financial Management Association, vol. 13(2), pages 333-370.
  • Handle: RePEc:bla:eufman:v:13:y:2007:i:2:p:333-370
    as

    Download full text from publisher

    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-036X.2006.00357.x
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Lamb, John D. & Tee, Kai-Hong, 2012. "Data envelopment analysis models of investment funds," European Journal of Operational Research, Elsevier, vol. 216(3), pages 687-696.
    3. Mustafa Onur Caglayan & Sevan Ulutas, 2014. "Emerging Market Exposures and the Predictability of Hedge Fund Returns," Financial Management, Financial Management Association International, vol. 43(1), pages 149-180, March.
    4. Auer, Benjamin R., 2014. "Should hedge funds be cautious reporting high returns?," Research in International Business and Finance, Elsevier, vol. 30(C), pages 195-201.
    5. Auer, Benjamin R. & Schuhmacher, Frank, 2013. "Robust evidence on the similarity of Sharpe ratio and drawdown-based hedge fund performance rankings," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 153-165.
    6. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2012. "Bank regulation and stability: An examination of the Basel market risk framework," Discussion Papers 09/2012, Deutsche Bundesbank.
    7. repec:pal:jorsoc:v:61:y:2010:i:12:d:10.1057_jors.2009.143 is not listed on IDEAS
    8. Eling, Martin & Faust, Roger, 2010. "The performance of hedge funds and mutual funds in emerging markets," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1993-2009, August.
    9. Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2012. "When more is less: Using multiple constraints to reduce tail risk," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2693-2716.
    10. Auer, Benjamin R. & Schuhmacher, Frank, 2013. "Performance hypothesis testing with the Sharpe ratio: The case of hedge funds," Finance Research Letters, Elsevier, vol. 10(4), pages 196-208.
    11. Bali, Turan G. & Brown, Stephen J. & Caglayan, Mustafa Onur, 2012. "Systematic risk and the cross section of hedge fund returns," Journal of Financial Economics, Elsevier, vol. 106(1), pages 114-131.
    12. Mila Getmansky & Peter A. Lee & Andrew W. Lo, 2015. "Hedge Funds: A Dynamic Industry In Transition," NBER Working Papers 21449, National Bureau of Economic Research, Inc.
    13. Boo, Yee Ling & Ee, Mong Shan & Li, Bob & Rashid, Mamunur, 2017. "Islamic or conventional mutual funds: Who has the upper hand? Evidence from Malaysia," Pacific-Basin Finance Journal, Elsevier, vol. 42(C), pages 183-192.
    14. Agarwal, Vikas & Ruenzi, Stefan & Weigert, Florian, 2017. "Tail risk in hedge funds: A unique view from portfolio holdings," Journal of Financial Economics, Elsevier, vol. 125(3), pages 610-636.
    15. Saralees Nadarajah & Bo Zhang & Stephen Chan, 2014. "Estimation methods for expected shortfall," Quantitative Finance, Taylor & Francis Journals, vol. 14(2), pages 271-291, February.
    16. Bali, Turan G. & Brown, Stephen J. & Caglayan, Mustafa Onur, 2011. "Do hedge funds' exposures to risk factors predict their future returns?," Journal of Financial Economics, Elsevier, vol. 101(1), pages 36-68, July.
    17. Martin Eling & Simone Farinelli & Damiano Rossello & Luisa Tibiletti, 2010. "Skewness in hedge funds returns: classical skewness coefficients vs Azzalini's skewness parameter," International Journal of Managerial Finance, Emerald Group Publishing, vol. 6(4), pages 290-304, September.
    18. Capitani, Daniel H.D. & Mattos, Fabio, 2015. "Feasibility of new agricultural futures contract: a study in the Brazilian rice market," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205565, Agricultural and Applied Economics Association.
    19. repec:pal:assmgt:v:17:y:2016:i:5:d:10.1057_jam.2016.7 is not listed on IDEAS
    20. repec:eee:empfin:v:42:y:2017:i:c:p:109-130 is not listed on IDEAS
    21. Grau-Carles, Pilar & Sainz, Jorge & Otamendi, Javier & Doncel, Luis Miguel, 2009. "Different risk-adjusted fund performance measures: a comparison," Economics Discussion Papers 2009-54, Kiel Institute for the World Economy (IfW).
    22. Capitani, Daniel Henrique Dario & Mattos, Fabio, 2012. "Risk measurement in commodities markets: How much price risk do agricultural producers really face?," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124761, Agricultural and Applied Economics Association.
    23. El Kalak, Izidin & Azevedo, Alcino & Hudson, Robert, 2016. "Reviewing the hedge funds literature II: Hedge funds' returns and risk management characteristics," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 55-66.
    24. George Aragon & Bing Liang & Hyuna Park, 2014. "Onshore and Offshore Hedge Funds: Are They Twins?," Management Science, INFORMS, vol. 60(1), pages 74-91, January.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:eufman:v:13:y:2007:i:2:p:333-370. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley Content Delivery) or (Christopher F. Baum). General contact details of provider: http://edirc.repec.org/data/efmaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.