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Downside Risk analysis applied to the Hedge Funds universe

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  • Perelló, Josep

Abstract

Hedge Funds are considered as one of the portfolio management sectors which shows a fastest growing for the past decade. An optimal Hedge Fund management requires an appropriate risk metrics. The classic CAPM theory and its Ratio Sharpe fail to capture some crucial aspects due to the strong non-Gaussian character of Hedge Funds statistics. A possible way out to this problem while keeping the CAPM simplicity is the so-called Downside Risk analysis. One important benefit lies in distinguishing between good and bad returns, that is: returns greater or lower than investor's goal. We revisit most popular Downside Risk indicators and provide new analytical results on them. We compute these measures by taking the Credit Suisse/Tremont Investable Hedge Fund Index Data and with the Gaussian case as a benchmark. In this way, an unusual transversal lecture of the existing Downside Risk measures is provided.

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  • Perelló, Josep, 2007. "Downside Risk analysis applied to the Hedge Funds universe," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 383(2), pages 480-496.
    • Handle: RePEc:eee:phsmap:v:383:y:2007:i:2:p:480-496
    DOI: 10.1016/j.physa.2007.04.079
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    References listed on IDEAS

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    1. John H. Cochrane, 1999. "Portfolio advice of a multifactor world," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 23(Q III), pages 59-78.
    2. John H. Cochrane, 1999. "New facts in finance," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 23(Q III), pages 36-58.
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    Cited by:

    1. Newton, David & Platanakis, Emmanouil & Stafylas, Dimitrios & Sutcliffe, Charles & Ye, Xiaoxia, 2021. "Hedge fund strategies, performance &diversification: A portfolio theory & stochastic discount factor approach," The British Accounting Review, Elsevier, vol. 53(5).

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