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Risk measures for autocorrelated hedge fund returns

  • Antonio Di Cesare

    ()

    (Bank of Italy)

  • Philip A. Stork

    ()

    (VU University Amsterdam)

  • Casper G. de Vries

    ()

    (Erasmus University Rotterdam)

Standard risk metrics tend to underestimate the true risks of hedge funds because of serial correlation in the reported returns. Getmansky, Lo, and Makarov(2004) derive mean, variance, Sharpe ratio, and beta formulae adjusted for serial correlation. Following their lead, we derive adjusted downside and global measures of individual and systemic risks. We distinguish between normally and fat tailed distributed returns and show that adjustment is particularly relevant for downside risk measures in the case of fat tails. A hedge fund case study reveals that the unadjusted risk measures considerably underestimate the true extent of individual and systemic risks.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 831.

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Date of creation: Nov 2011
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Handle: RePEc:bdi:wptemi:td_831_11
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  11. 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, vol. 74(3), pages 529-609, December.
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