Do Hedge Funds Have Enough Capital? A Value-at-Risk Approach
Case Western Reserve University - Department of Banking & Finance
University of Massachusetts Amherst - Department of Finance
EFA 2003 Annual Conference Paper No. 376
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"
Number of Pages in PDF File: 40
Keywords: Hedge funds, Value-at-Risk, Capital adequacy, Extreme value theory, Monte Carlo simulation.
JEL Classification: G23, G28, G29
Date posted: August 3, 2003