Downside Risk Analysis Applied to the Hedge Funds Universe

25 Pages Posted: 27 Jul 2007

See all articles by Josep Perelló

Josep Perelló

University of Barcelona - Department of Physics

Date Written: April 2007

Abstract

Hedge Funds are considered as one of the portfolio management sectors which shows a fastest growing for the past decade. An optimal Hedge Fund management requires an appropriate risk metrics. The classic CAPM theory and its Ratio Sharpe fail to capture some crucial aspects due to the strong non-Gaussian character of Hedge Funds statistics. A possible way out to this problem while keeping the CAPM simplicity is the so-called Downside Risk analysis. One important benefit lies in distinguishing between good and bad returns, that is: returns greater or lower than investor's goal. We revisit most popular Downside Risk indicators and provide new analytical results on them. We compute these measures by taking the Credit Suisse/Tremont Investable Hedge Fund Index Data and with the Gaussian case as a benchmark. In this way an unusual transversal lecture of the existing Downside Risk measures is provided.

Keywords: Hedge Funds, Downside Risk, CAPM

Suggested Citation

Perello, Josep, Downside Risk Analysis Applied to the Hedge Funds Universe (April 2007). Available at SSRN: https://ssrn.com/abstract=1003346 or http://dx.doi.org/10.2139/ssrn.1003346

Josep Perello (Contact Author)

University of Barcelona - Department of Physics ( email )

Diagonal, 647
Barcelona, E-08028
Spain
+34 9 34021150 (Phone)
+34 34021149 (Fax)

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