Risk Measures for Autocorrelated Hedge Fund Returns
Antonio Di Cesare
Bank of Italy
Philip A. Stork
VU University Amsterdam - Faculty of Economics and Business Administration; Duisenberg School of Finance
Casper G. De Vries
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
October 14, 2011
Bank of Italy Temi di Discussione (Working Paper) No. 831
Standard risk metrics tend to underestimate the true risks of hedge funds because of serial correlation in the reported returns. Getmansky, Lo, and Makarov(2004) derive mean, variance, Sharpe ratio, and beta formulae adjusted for serial correlation. Following their lead, we derive adjusted downside and global measures of individual and systemic risks. We distinguish between normally and fat tailed distributed returns and show that adjustment is particularly relevant for downside risk measures in the case of fat tails. A hedge fund case study reveals that the unadjusted risk measures considerably underestimate the true extent of individual and systemic risks.
Number of Pages in PDF File: 53
Keywords: hedge funds, serial correlation, systemic risk, VaR, Pareto distribution
JEL Classification: G12, G23, G28working papers series
Date posted: February 14, 2012
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