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Forecasting Hedge Funds Volatility: A Risk Management Approach

Paulo Rui P. Vitor Monteiro

Banco Invest, S.A

March 2004

We evaluate the performance of volatility and Value-at-Risk models for hedge fund indexes over the period from January 1994 to December 2003. The exponentially weighted sample variance (EWMA) and E-GARCH models have the best volatility forecast performance for hedge funds in terms of statistical loss functions. In contrast for traditional assets, the best volatility model is the simple sample variance. There is evidence that hedge fund volatility is less persistent that stocks and bonds volatility. We find that the critical decision in selecting a Value-at-Risk model for hedge funds is the distributional assumption. However, in contrast with traditional assets for which the normal distribution presents the best performance, the t-student and, especially the Cornish-Fisher expansion, distributional assumptions present the best performance.

Number of Pages in PDF File: 61

Keywords: Hedge Funds, Volatility, Value at Risk

JEL Classification: C5, G10

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Date posted: July 29, 2004  

Suggested Citation

P. Vitor Monteiro, Paulo Rui, Forecasting Hedge Funds Volatility: A Risk Management Approach (March 2004). Available at SSRN: https://ssrn.com/abstract=570065 or http://dx.doi.org/10.2139/ssrn.570065

Contact Information

Paulo Rui P. Vitor Monteiro (Contact Author)
Banco Invest, S.A ( email )
Av. Eng. Duarte Pacheco, 1 - 11º
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