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Abstract:
This paper highlights the inadequacies of traditional RAPMs (Risk-Adjusted Performance Measures) and proposes AIRAP (Alternative Investments Risk Adjusted Performance), based on Expected Utility theory, as a RAPM better suited to Alternative Investments. AIRAP is the implied certain return that a risk-averse investor would trade off for holding risky assets. AIRAP captures the full distribution, penalizes for volatility and leverage, is customizable by risk aversion, works with negative mean returns, eschews moment estimation or convergence requirements and can dovetail with stressed scenarios or regime-switching models. A modified Sharpe Ratio is proposed. The results are contrasted with Sharpe, Treynor and Jensen rankings to show significant divergence. Evidence of non-normality and the tradeoff between mean-variance merits vis-a-vis higher moment risks is noted. The dependence of optimal leverage on risk aversion and track record is noted. The results have implications for manager selection and fund of hedge funds portfolio construction.

Hedge Funds, Risk Adjusted Performance, Certainty Equivalent, AIRAP

Abstract:
This paper highlights the inadequacies of traditional RAPMs (Risk-Adjusted Performance Measures) and proposes AIRAP (Alternative Investments Risk Adjusted Performance), based on Expected Utility theory, as a RAPM better suited to Alternative Investments. AIRAP is the implied certain return that a risk-averse investor would trade off for holding risky assets. AIRAP captures the full distribution, penalizes for volatility and leverage, is customizable by risk aversion, works with negative mean returns, eschews moment estimation or convergence requirements and can dovetail with stressed scenarios or regime-switching models. A modified Sharpe Ratio is proposed. The results are contrasted with Sharpe, Treynor and Jensen rankings to show significant divergence. Evidence of non-normality and the tradeoff between mean-variance merits vis-a-vis higher moment risks is noted. The dependence of optimal leverage on risk aversion and track record is noted. The results have implications for manager selection and fund of hedge funds portfolio construction.

Hedge Funds, Risk Adjusted Performance, Certainty Equivalent, AIRAP

Abstract:
This paper investigates issues of risk-adjusted performance, value added and leverage for hedge funds. It applies AIRAP (Alternative Investments Risk Adjusted Performance), which is the power utility implied certain return that a risk-averse investor would trade off for holding risky assets, to hedge fund indices and individual hedge fund data. Inferences are made about the value added by hedge funds and the difference between directional and non-directional strategies. Evidence of non-normality, higher moment risks and the trade-off between mean-variance profile vis-a-vis skewness and kurtosis is noted across style categories. Further, survivorship bias is estimated across style categories in the first four moments.

AIRAP, Hedge Funds, Certainty Equivalent, Skewness, Kurtosis

Abstract:
This paper investigates issues of risk-adjusted performance, value added and leverage for hedge funds. It applies AIRAP (Alternative Investments Risk Adjusted Performance), which is the power utility implied certain return that a risk-averse investor would trade off for holding risky assets, to hedge fund indices and individual hedge fund data. Inferences are made about the value added by hedge funds and the difference between directional and non-directional strategies. Evidence of non-normality, higher moment risks and the trade-off between mean-variance profile vis-a-vis skewness and kurtosis is noted across style categories. Further, survivorship bias is estimated across style categories in the first four moments.

AIRAP, Hedge Funds, Certainty Equivalent, Skewness, Kurtosis

Abstract:
This paper presents a framework for the valuation of cancelable cross currency Bermudan swaps. We use a lognormal process for the exchange rate while the domestic & foreign forward rates are assumed to be Gaussian as in Heath et al. (1992). Monte-Carlo simulation is utilized for valuation via an extension to several dimensions of the methodology for simulating American options proposed by Grant et al. (1994). As special cases the model can be used to value cross currency swaps and single exercise Bermudans which can be used for benchmarking purposes.

Monte-Carlo, Bermudan, Swaption, Heath-Jarrow-Morton