Risk Measures for Autocorrelated Hedge Fund Returns

44 Pages Posted: 2 May 2011

See all articles by Antonio Di Cesare

Antonio Di Cesare

Bank of Italy

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Casper G. de Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: May 2, 2011

Abstract

Standard risk metrics tend to underestimate the true risks of hedge funds because of serial correlation in the reported returns. Getmansky et al. (2004) derive mean, variance, Sharpe ratio, and beta formulae adjusted for serial correlation. Following their lead, adjusted downside and global measures of individual and systemic risks are derived. We distinguish between normally and fat tailed distributed returns and show that adjustment is particularly relevant for downside risk measures in the case of fat tails. A hedge fund case study reveals that the unadjusted risk measures considerably underestimate the true extent of individual and systemic risks.

Keywords: Hedge funds, Serial correlation,Systemic risk, VaR, Pareto distribution

JEL Classification: G12, G23, G28

Suggested Citation

Di Cesare, Antonio and Stork, Philip A. and De Vries, Casper, Risk Measures for Autocorrelated Hedge Fund Returns (May 2, 2011). Available at SSRN: https://ssrn.com/abstract=1828662 or http://dx.doi.org/10.2139/ssrn.1828662

Antonio Di Cesare (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Casper De Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

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Tinbergen Institute

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+31 10 408 8956 (Phone)
+31 10 408 9147 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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