Measuring Risk in the Hedge Fund Sector
International Monetary Fund
Current Issues in Economics and Finance, Vol. 13, No. 3, March/April 2007
Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998. A comparison of the current rise in correlations with the elevation before the 1998 event, however, reveals a key difference. The current increase stems mainly from a decline in the volatility of returns, while the earlier rise was driven by high covariances - an alternative measure of comovement in dollar terms. Because volatility and covariances are lower today, the current hedge fund environment differs from the 1998 environment.
Number of Pages in PDF File: 7
Keywords: hedge funds, systemic risk, LTCM crisis
JEL Classification: G0, G1, G2, G3
Date posted: September 27, 2007