Abstract

http://ssrn.com/abstract=1142844
 
 

References (12)



 
 

Citations (4)



 


 



The Tail that Wags the Hedge Fund Dog


Craig W. French


Portfolio Engineering Laboratory

June 9, 2008


Abstract:     
We consider a portfolio of hedge funds as a portfolio of insurance policies against a set of risk factors. We highlight some deficiencies of linear estimation procedures and apply several nonlinear approaches to an individual hedge fund and also to a set of investable hedge fund indices. We apply Extreme Value Theory to the estimation of hedge funds tail risk. We find that although some hedge fund indices may apparently be well-fit by short-, medium-, and long-tailed classes of Generalized Extreme Value distributions, in practice it is more conservative to use the longest-tailed class of GEV for which statistically significant goodness-of-fit may be attained. In particular we find that, examining the monthly returns of twelve HFRX investable hedge fund indexes over the ten-year period from January 1998 through December 2007, seven indexes are well-fit by long-tailed distributions including the generalized Pareto and the Cauchy, while five indexes are well-fit by the medium-tailed Gamma distribution. Care should be taken because seven of the twelve indexes also appear to be well-fit by the normal distribution, and we caution that for purposes of tail-risk estimation, acceptance of the normal distribution would prove illusory and hazardous.

Number of Pages in PDF File: 22

Keywords: hedge fund, extreme value theory, regression, Cauchy, Gamma

JEL Classification: G1, G23


Open PDF in Browser Download This Paper

Date posted: June 11, 2008  

Suggested Citation

French, Craig W., The Tail that Wags the Hedge Fund Dog (June 9, 2008). Available at SSRN: http://ssrn.com/abstract=1142844 or http://dx.doi.org/10.2139/ssrn.1142844

Contact Information

Craig W. French (Contact Author)
Portfolio Engineering Laboratory ( email )
115 Pondview Drive
Washington Crossing, PA Pennsylvania 18977
United States
6108446040 (Phone)
Feedback to SSRN


Paper statistics
Abstract Views: 1,266
Downloads: 272
Download Rank: 82,353
References:  12
Citations:  4
People who downloaded this paper also downloaded:
1. The Tail that Wags the Hedge Fund Dog (Slideshow Presentation)
By Craig French

© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollobot1 in 0.188 seconds