Form PF and Hedge Funds: Risk-Measurement Precision for Option Portfolios

Posted: 25 Mar 2016 Last revised: 22 May 2019

See all articles by Mark D. Flood

Mark D. Flood

R. H. Smith School of Business, U. of Maryland

Phillip Monin

Government of the United States of America, Department of the Treasury, Office of Financial Research

Date Written: March 23, 2016

Abstract

The Securities and Exchange Commission’s Form PF is the implementation of Congress’s post-crisis mandate for risk reporting by hedge funds to help protect investors and monitor systemic risk. We extend the methodology of Flood, Monin, and Bandyopadhyay [2015] to assess the risk measurement tolerances of Form PF for portfolios including options exposures. We generate a range of simulated portfolios of equities and equity options, where the weights are calibrated so that portfolios appear identical on Form PF. We assess the measurement tolerances of Form PF by examining the minimum-maximum range of actual risk exposures as measured directly from portfolio details. We find that the possible range of variation is significant. For portfolios that include options but do not report value at risk on Form PF, the range is especially large.

Keywords: Hedge funds; Form PF; data quality; systemic risk; risk monitoring

Suggested Citation

Flood, Mark D. and Monin, Phillip, Form PF and Hedge Funds: Risk-Measurement Precision for Option Portfolios (March 23, 2016). Journal of Alternative Investments, Vol. 18, No. 4, 2006; Office of Financial Research Working Paper 16-02; https://doi.org/10.3905/jai.2016.18.4.125. Available at SSRN: https://ssrn.com/abstract=2753765 or http://dx.doi.org/10.2139/ssrn.2753765

Mark D. Flood (Contact Author)

R. H. Smith School of Business, U. of Maryland ( email )

College Park
College Park, MD 20742
United States

Phillip Monin

Government of the United States of America, Department of the Treasury, Office of Financial Research ( email )

717 14th St NW
Washington, DC 20005
United States

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