Risk Measures for Autocorrelated Hedge Fund Returns

Bank of Italy Temi di Discussione (Working Paper) No. 831.

Revised version: Journal of Financial Econometrics Forthcoming

53 Pages Posted: 14 Feb 2012 Last revised: 20 Aug 2014

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)

Multiple version iconThere are 2 versions of this paper

Date Written: October 14, 2011

Abstract

Standard risk metrics tend to underestimate the true risks of hedge funds because of serial correlation in the reported returns. Getmansky, Lo, and Makarov (2004) derive mean, variance, Sharpe ratio, and beta formulae adjusted for serial correlation. Following their lead, we derive adjusted downside and global measures of individual and systemic risks. 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.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2467834

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 (October 14, 2011). Bank of Italy Temi di Discussione (Working Paper) No. 831., Revised version: Journal of Financial Econometrics Forthcoming, Available at SSRN: https://ssrn.com/abstract=2004404 or http://dx.doi.org/10.2139/ssrn.2004404

Antonio Di Cesare (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
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Philip A. Stork

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

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Tinbergen Institute ( email )

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Casper De Vries

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

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