Market Risk Management for Hedge Funds : Foundations of the Style and Implicit Value-at-Risk

by Francois Duc (UBP Alternative Investments); Yann Schorderet (Mirabaud & Cie, banquiers)

• ISBN13: 9780470740798
• ISBN10: 0470740795
• Additional ISBN(s): 9780470722992
• Format: eBook
• Copyright: 2010-04-01
• Publisher: Wiley
• More Book Details
• Purchase Benefits

Summary

This book provides a cutting edge introduction to market risk management for Hedge Funds, Hedge Funds of Funds, and the numerous new indices and clones launching coming to market on a near daily basis. It will present the fundamentals of quantitative risk measures by analysing the range of Value-at-Risk (VaR) models used today, addressing the robustness of each model, and looking at new risk measures available to more effectively manage risk in a hedge fund portfolio. The book begins by analysing the current state of the hedge fund industry - at the ongoing institutionalisation of the market, and at its latest developments. It then moves on to examine the range of risks, risk controls, and risk management strategies currently employed by practitioners, and focuses on particular risks embedded in the more classic investment strategies such as Long/Short, Convertible Arbitrage, Fixed Income Arbitrage, Short selling and risk arbitrage. Addressed along side these are other risks common to hedge funds, including liquidity risk, leverage risk and counterparty risk.The book then moves on to examine more closely two models which provide the underpinning for market risk management in investment today - Style Value-at-Risk and Implicit Value-at-Risk. As well as full quantitative analysis and backtesting of each methodology, the authors go on to propose a new style model for style and implicit Var, complete with analysis, real life examples and backtesting. The authors then go on to discuss annualisation issues and risk return before moving on to propose a new model based on the authors own Best Choice Implicit VaR approach, incorporating quantitative analysis, market results and backtesting and also its potential for new hedge fund clone products.This book is the only guide to VaR for Hedge Funds and will prove to be an invaluable resource as we embark into an era of increasing volatility and uncertainty.

Table of Contents

Acknowledgements

Introduction

Fundamentals for Style and Implicit Values-at-Risk

Ongoing Institutionalization

Hedge funds industry size and asset flows

Style distribution

2006-2007 structural developments

Are hedge funds becoming decent?

Funds of hedge funds persistence

Heterogeneity of Hedge Funds

Testing sample

Smoothing effect of a restrictive classification

Heterogeneity revealed through Modern Cluster Analysis

Appendix A: Indices sample

Active and Passive Hedge Fund Indices

Illusions fostered by active hedge fund indices

Passive indices and the illusion of being clones

Conclusion

The Four Dimensions of Risk Management for Hedge Funds

Operational and structural risk

Risk control

Delegation risk

Direct investment risk

Conclusion

Appendix B: Risks embedded with some classical alternative strategies

Appendix C: Other common risks to hedge funds

Style Value-at-Risk

The Original Style VaR Revisited 77

The Multi-Index Model

The Style Value-at-Risk

Backtesting revisited

The New Style Model

Extreme Value Theory

Risk consolidation

The New Style Model

Appendix D: Algorithms for the elemental percentile method

Appendix E: Copulas

Annualization Problem

Annualization of the main statistical indicators assuming i.i.d

Annualization of Value-at-Risk assuming i.i.d

Annualization without assuming i.i.d

Applications to the Style Value-at-Risk

Appendix F: annualization of excess kurtosis

Appendix G: Drost and Nijman Theorem

Implicit Value-at-Risk

The Best Choice Implicit Value-at-Risk

Alternative style analysis and BCI Model

Theoretical framework of BCIM

Best Choice Implicit VaR

Empirical Tests

BCI Model and Hedge Fund Clones

Ten-Factor Model

Non-Linear Model

Risk Budgeting

Value-at-Risk of a multi-managers portfolio

Risk decomposition: 'before and after' attribution

Risk decomposition: closed form attribution

Value-at-Risk Monitoring

Analyzing graveyards and hedge funds demise

The probit model

Empirical evidence

Implications for portfolio management

Beyond Value-at-Risk

2007-2008 liquidity crisis and hedge funds

Mechanical stress test

Liquidity-adjusted Value-at-Risk

Limit of liquidity-adjusted Value-at-Risk and liquidity scenario

Bibliography

Index

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