Measuring Risk in the Hedge Fund Sector
7 Pages Posted: 27 Sep 2007
Abstract
Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998. A comparison of the current rise in correlations with the elevation before the 1998 event, however, reveals a key difference. The current increase stems mainly from a decline in the volatility of returns, while the earlier rise was driven by high covariances - an alternative measure of comovement in dollar terms. Because volatility and covariances are lower today, the current hedge fund environment differs from the 1998 environment.
Keywords: hedge funds, systemic risk, LTCM crisis
JEL Classification: G0, G1, G2, G3
Suggested Citation: Suggested Citation
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