Style Analysis and Value at Risk of Asia-Focused Hedge Funds

Abstract

In this paper, we attempt to identify risk factors for Asia-focused hedge funds through modified style analysis technique. Using an Asian hedge fund index, we find that Asian hedge funds show significant positive exposures to emerging equity markets, especially emerging markets in Asia, and also hold significant portion of portfolio in cash and high credit rating bonds while short sell world government bond and emerging market bonds. A rolling window style analysis is further employed to analyse the time-variation risk exposures of Asian hedge funds. For both static and rolling period style analysis, our model provides a high explanatory power for returns of the hedge fund index. We further conduct a Value-at-Risk analysis using the results of rolling window style analysis as inputs. Our results indicate that the accuracy of VaR model is dominated by its ability to capture the tail distribution of the hedge fund returns. Moreover, the distribution assumption is superior to the volatility model in VaR forecast. Also, our findings suggest that parametric approach outperforms the historical simulation based past observation.

Keywords: Hedge fund; Style analysis; Value-at-risk; Emerging markets.