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Do Risk Management Practices Work? Evidence from Hedge Funds

51 Pages Posted: 9 Dec 2010 Last revised: 16 Dec 2016

Gavin Cassar

INSEAD

Joseph J. Gerakos

Tuck School of Business at Dartmouth College

Date Written: December 15, 2016

Abstract

We examine hedge fund risk management practices and their association with left-tail risk during the 2008 financial crisis. Consistent with risk management practices reducing left-tail risk, funds in our sample that use formal risk models performed significantly better in the extreme down months of 2008. We find no evidence that having either a dedicated head of risk management or position limits are associated with reduced left-tail risk. Funds employing value at risk models had more accurate expectations of how they would perform in a short-term equity bear market.

Keywords: hedge funds, risk management, expectations, performance

Suggested Citation

Cassar, Gavin and Gerakos, Joseph J., Do Risk Management Practices Work? Evidence from Hedge Funds (December 15, 2016). Chicago Booth Research Paper No. 13-13; Fama-Miller Working Paper; 26th Australasian Finance and Banking Conference 2013. Available at SSRN: https://ssrn.com/abstract=1722250 or http://dx.doi.org/10.2139/ssrn.1722250

Gavin Cassar (Contact Author)

INSEAD ( email )

Boulevard de Constance
Fontainebleau, 77305
France

HOME PAGE: http://https://www.insead.edu/faculty-research/faculty/gavin-cassar

Joseph J. Gerakos

Tuck School of Business at Dartmouth College ( email )

Hanover, NH 03755
United States

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