Tail Risk in Hedge Funds: A Unique View from Portfolio Holdings

74 Pages Posted: 2 Nov 2014 Last revised: 13 Aug 2016

Vikas Agarwal

Georgia State University; University of Cologne - Centre for Financial Research (CFR)

Stefan Ruenzi

University of Mannheim - Department of International Finance

Florian Weigert

University of St. Gallen - School of Finance

Date Written: August 10, 2016

Abstract

We develop a new systematic tail risk measure for equity-oriented hedge funds to examine the impact of tail risk on fund performance and to identify the sources of tail risk. We find that tail risk affects the cross-sectional variation in fund returns, and investments in both, tail-sensitive stocks as well as options, drive tail risk. Moreover, leverage and exposure to funding liquidity shocks are important determinants of tail risk. We find evidence of some funds being able to time tail risk exposure prior to the recent financial crisis.

Keywords: Hedge Funds, Tail Risk, Portfolio Holdings, Funding Liquidity Risk, Leverage

JEL Classification: G11, G23

Suggested Citation

Agarwal, Vikas and Ruenzi, Stefan and Weigert, Florian, Tail Risk in Hedge Funds: A Unique View from Portfolio Holdings (August 10, 2016). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2517799 or http://dx.doi.org/10.2139/ssrn.2517799

Vikas Agarwal (Contact Author)

Georgia State University ( email )

35 Broad Street,
Suite 1221
Atlanta, GA 30303-3083
United States
404-413-7326 (Phone)
404-413-7312 (Fax)

HOME PAGE: http://www.gsu.edu/~fncvaa

University of Cologne - Centre for Financial Research (CFR)

Albertus-Magnus Platz
Cologne, 50923
Germany

Stefan Ruenzi

University of Mannheim - Department of International Finance ( email )

L9, 1-2
Mannheim, 68131
Germany

Florian Weigert

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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