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Risks and Portfolio Decisions Involving Hedge Funds

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Author Info
Vikas Agarwal
Abstract

This article characterizes the systematic risk exposures of hedge funds using buy-and-hold and option-based strategies. Our results show that a large number of equity-oriented hedge fund strategies exhibit payoffs resembling a short position in a put option on the market index and therefore bear significant left-tail risk, risk that is ignored by the commonly used mean-variance framework. Using a mean-conditional value-at-risk framework, we demonstrate the extent to which the mean-variance framework underestimates the tail risk. Finally, working with the systematic risk exposures of hedge funds, we show that their recent performance appears significantly better than their long-run performance. Copyright 2004, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhg044
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Publisher Info
Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 17 (2004)
Issue (Month): 1 ()
Pages: 63-98
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Handle: RePEc:oup:rfinst:v:17:y:2004:i:1:p:63-98

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  1. Loriana Pelizzon & Monica Billio & Mila Getmansky, 2008. "Crisis and Hedge Fund Risk," Working Papers 2008_10, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
  2. Dean P. Foster & H. Peyton Young, 2008. "The Hedge Fund Game: Incentives, Excess Returns, and Piggy-Backing," Economics Series Working Papers 378, University of Oxford, Department of Economics. [Downloadable!]
  3. Gordon J. Alexander & Alexandre M. Baptista & Shu Yan, 2009. "Reducing estimation risk in optimal portfolio selection when short sales are allowed," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(5), pages 281-305. [Downloadable!]
  4. Loriana Pelizzon & Monica Billio & Mila Getmansky, 2008. "Non-Parametric Analysis of Hedge Fund Returns: New Insights from High Frequency Data," Working Papers 2008_11, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
  5. Monica Billio & Mila Getmansky & Loriana Pelizzon, 2007. "Dynamic Risk Exposure in Hedge Funds," Working Papers 2007_17, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
  6. Andrew Ang & Matthew Rhodes-Kropf & Rui Zhao, 2008. "Do Funds-of-Funds Deserve Their Fees-on-Fees?," NBER Working Papers 13944, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Antonio Diez de los Rios & René Garcia, 2006. "Assessing and Valuing the Non-Linear Structure of Hedge Fund Returns," Working Papers 06-31, Bank of Canada. [Downloadable!]
  8. Tobias Adrian & Markus K. Brunnermeier, 2008. "CoVaR," Staff Reports 348, Federal Reserve Bank of New York. [Downloadable!]
  9. Yan Olszewski, 2005. "Building a Better Fund of Hedge Funds: A Fractal and Alpha - Stable Distribution Approach," Finance 0507018, EconWPA, revised 20 Jul 2005. [Downloadable!]
  10. Joseph Chen & Samuel Hanson & Harrison Hong & Jeremy C. Stein, 2008. "Do Hedge Funds Profit From Mutual-Fund Distress?," NBER Working Papers 13786, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Nicole M. Boyson & Christof W. Stahel & Rene M. Stulz, 2006. "Is There Hedge Fund Contagion?," NBER Working Papers 12090, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Peyton Young & Dean P Foster, 2008. "The Hedge Fund Game," Economics Papers 2008-W01, Economics Group, Nuffield College, University of Oxford. [Downloadable!]
  13. Daniel P. J. Capocci, 2009. "The persistence in hedge fund performance: extended analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(3), pages 233-255. [Downloadable!]
  14. Wong, Woon K & Copeland, Laurence, 2008. "Risk Measurement and Management in a Crisis-Prone World," Cardiff Economics Working Papers E2008/14, Cardiff University, Cardiff Business School, Economics Section. [Downloadable!]
  15. Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2005. "Systemic Risk and Hedge Funds," NBER Working Papers 11200, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
    • Nicholas Chan & Mila Getmansky & Shane M. Haas & Andrew W. Lo, 2007. "Systemic Risk and Hedge Funds," NBER Chapters, in: The Risks of Financial Institutions, pages 235-338 National Bureau of Economic Research, Inc. [Downloadable!]
  16. James O'Brien & Jeremy Berkowitz, 2005. "Estimating Bank Trading Risk: A Factor Model Approach," NBER Working Papers 11608, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Fousseni Chabi-Yo, 2006. "Conditioning Information and Variance Bounds on Pricing Kernels with Higher-Order Moments: Theory and Evidence," Working Papers 06-38, Bank of Canada. [Downloadable!]
  18. Szabolcs Blazsek & Anna Downarowicz, 2008. "Regime switching models of hedge fund returns," Faculty Working Papers 12/08, School of Economics and Business Administration, University of Navarra. [Downloadable!]
  19. Marie Brière & Alexandre Burgues & Ombretta Signori, 2008. "Volatility Exposure for Strategic Asset Allocation," Working Papers CEB 08-034.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
  20. Dai, John & Sundaresan, Suresh, 2009. "Risk Management Framework for Hedge Funds: Role of Funding and Redemption Options on Leverage," MPRA Paper 16483, University Library of Munich, Germany. [Downloadable!]
  21. Nicole M. Boyson & Christof W. Stahel & Rene M. Stulz, 2008. "Hedge Fund Contagion and Liquidity," NBER Working Papers 14068, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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