Risk Analysis of Hedge Funds Versus Long-Only Portfolios

Abstract:     
This article examines empirical evidence of active performance differences in long-only versus long/short investing. It also provides potential explanations from the standpoint of compensation and investment constraints.

To further gain insight of how hedge funds incur risks, the article reviews the evolution of methodologies for analyzing hedge fund risk. It first examines return/risk patterns of various hedge fund investments and issues related to data reliability. Risk factors related to market returns, economic conditions and financial markets are presented. The article proposes an alternative method of analyzing "investment style" as applied to hedge fund investments. It also reviews the contingent claim approach to hedge fund risk analysis: replicating hedge fund's option-like payoffs or trading strategies. The investment implications are discussed in the final section

Number of Pages in PDF File: 38

Keywords: Hedge funds, risk analysis

working papers series