Hedge funds sold the dream to investors of being able to easily hedge risk. However, LTCM and the recent crisis show that this is not the case. The new frontier in this field is the construction of portfolio of hedge funds, the so called Funds of Hedge Funds. The aim is to eliminate risk through diversification. This paper investigates data on funds of hedge funds indexes provided by Barclays and HFR and shows that, mostly during this recent crisis, Funds of Hedge Funds present large and fat left-hand tails. Using our decomposition procedure based on a multifactor switching regime model we find that Credit Risk is by far the most important factor for tail risk of Funds of Hedge Funds during crisis. Other important factors include term spread and momentum.

Crises and Fund of Hedge Funds Tail Risk

BILLIO, Monica;PELIZZON, Loriana
2013

Abstract

Hedge funds sold the dream to investors of being able to easily hedge risk. However, LTCM and the recent crisis show that this is not the case. The new frontier in this field is the construction of portfolio of hedge funds, the so called Funds of Hedge Funds. The aim is to eliminate risk through diversification. This paper investigates data on funds of hedge funds indexes provided by Barclays and HFR and shows that, mostly during this recent crisis, Funds of Hedge Funds present large and fat left-hand tails. Using our decomposition procedure based on a multifactor switching regime model we find that Credit Risk is by far the most important factor for tail risk of Funds of Hedge Funds during crisis. Other important factors include term spread and momentum.
RECONSIDERING FUNDS OF HEDGE FUNDS: THE FINANCIAL CRISIS AND BEST PRACTICES IN UCITS, TAIL RISK, PERFORMANCE, AND DUE DILIGENCE
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/10278/36218
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