Hedge Fund Tail Risk: An Investigation in Stressed Markets, Extended Version with Appendix

Abstract

This paper develops several risk measures that captures the tail risk of single hedge fund strategies and the tail risk contribution of these hedge fund strategies to the overall portfolio tail risk, conditional on the level of market distress. We show that, during the recent global financial crisis, all the different hedge fund strategies are contributing to the tail risk of the portfolio of hedge funds, mostly because of the hedge fund strategies' exposure to liquidity and credit risk.

Keywords: Hedge funds, Tail risk, Diversification, Marginal risk contribution

JEL Classification: G11, G29