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Calculating hedge fund risk: the draw down and the maximum draw down

Author

Listed:
  • Alessio Sancetta
  • Steve Satchell

Abstract

Hedge funds, defined in this context as geared financial entities, frequently use some measure of point loss as a risk measure. This paper considers the statistical properties of an uninterrupted fall in a security price; called a draw down. The distribution of the draw downs in an N-trading period is derived together with an approximation to the distribution of the maximum. Complementary results are provided which are useful for risk calculations. A brief empirical study of the S&P futures is included in order to highlight some of the limitations in the presence of extreme events.

Suggested Citation

  • Alessio Sancetta & Steve Satchell, 2004. "Calculating hedge fund risk: the draw down and the maximum draw down," Applied Mathematical Finance, Taylor & Francis Journals, vol. 11(3), pages 259-282.
    • Handle: RePEc:taf:apmtfi:v:11:y:2004:i:3:p:259-282
    DOI: 10.1080/1350486042000220553
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    Citations

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    Cited by:

    1. Caicedo-Llano, Juliana & Dionysopoulos, Thomas, 2008. "Market integration: A risk-budgeting guide for pure alpha investors," Journal of Multinational Financial Management, Elsevier, vol. 18(4), pages 313-327, October.
    2. Sager, Michael & Taylor, Mark P., 2014. "Generating currency trading rules from the term structure of forward foreign exchange premia," Journal of International Money and Finance, Elsevier, vol. 44(C), pages 230-250.
    3. J-H Steffi Yang, 2004. "The Markovian Dynamics of "Smart Money"," Econometric Society 2004 Far Eastern Meetings 797, Econometric Society.

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