Tail Risk Exposures of Hedge Funds: Evidence From Unique Brazilian Data

31 Pages Posted: 3 Jun 2019

See all articles by Caio Almeida

Caio Almeida

Getulio Vargas Foundation ; Princeton University

Marcelo Fernandes

Queen Mary University of London - Economics Department

Joao Paulo Valente

Yale University, Department of Economics, Students

Date Written: May 6, 2019

Abstract

This paper examines tail risk in the Brazilian hedge fund industry. We rely on a unique data set of daily returns for every hedge fund in Brazil, dead or alive. By employing the universe of hedge funds, we ensure the absence of selection, survivorship, and instant history biases. We estimate tail risk measures based on the cross-section of both equity and hedge-fund returns. We consider three tail risk measures. The first extracts a tail risk measure assuming that the tail of the cross-section distribution has a power law representation, whereas the second and third rely on the expected shortfall of the cross-section distribution under the physical and risk-neutral measures, respectively. We find that the tail risk estimates are very different not only across asset classes (equity vs hedge fund), but also across probability measures (physical vs risk neutral). More interestingly, we also show that, although the hedge fund industry in Brazil seems to exhibit more exposure to equity tail risk, hedge fund tail risk entails higher predictive ability to performance both over time and cross-sectionally.

Keywords: alternative investment, convergence trading, entropy, expected shortfall, power law

Suggested Citation

Almeida, Caio and Fernandes, Marcelo and Valente, Joao Paulo, Tail Risk Exposures of Hedge Funds: Evidence From Unique Brazilian Data (May 6, 2019). Available at SSRN: https://ssrn.com/abstract=3386376 or http://dx.doi.org/10.2139/ssrn.3386376

Caio Almeida

Getulio Vargas Foundation ( email )

Praia de Botafogo 190, 11o andar
Botafogo
Rio de Janeiro, Rio de Janeiro 22250-900
Brazil
5521-37995827 (Phone)
5521-2553-8821 (Fax)

HOME PAGE: http://www.fgv.br/professor/calmeida/

Princeton University ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States

Marcelo Fernandes (Contact Author)

Queen Mary University of London - Economics Department ( email )

Mile End Road
London, E1 4NS
United Kingdom
+44 (0)20 7882 5082 (Phone)
+44 (0)20 8983 3580 (Fax)

Joao Paulo Valente

Yale University, Department of Economics, Students ( email )

28 Hillhouse Ave
New Haven, CT 06520-8268
United States

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