Capturing Risks of Non-Transparent Hedge Funds
13 Pages Posted: 6 Feb 2010
Date Written: February 1, 2008
We present a model that captures risks of hedge funds only using their historical performance as input. This statistical model is a multivariate distribution where the marginals derive from an AR(1)/AGARCH(1,1) process with t_5 innovations, and the dependency is a grouped-t copula. The process captures all relevant static and dynamic characteristics of hedge fund returns, while the copula enables us to go beyond linear correlation and capture strategy-specific tail dependency. We show how to estimate parameters and then successfully backtest our model and some peer models using 600 hedge funds.
Keywords: Hedge fund, AGARCH, copula, risk
JEL Classification: C32
Suggested Citation: Suggested Citation