Do Hedge Funds Have Enough Capital? A Value-at-Risk Approach
40 Pages Posted: 3 Aug 2003
Date Written: April 2004
We examine the risk characteristics and capital adequacy of hedge funds through the Value-at-Risk approach. Using extensive data on nearly fifteen hundred hedge funds, we find that only 3.7% live and 10.9% dead funds are under-capitalized as of March 2003. Moreover, the under-capitalized funds are relatively small and constitute a tiny fraction of the total fund assets in our sample. Cross-sectionally, the variability in fund capitalization is related to size, investment style, age, and management fee. Hedge fund risk and capitalization also display significant time variation. Traditional risk measures like standard deviation or leverage ratios fail to detect these trends.
Note: Previously titled "Do Hedge Funds Have Enough Capital? A Value-at-Risk Approach"
Keywords: Hedge funds, Value-at-Risk, Capital adequacy, Extreme value theory, Monte Carlo simulation.
JEL Classification: G23, G28, G29
Suggested Citation: Suggested Citation