Market Risk Management for Hedge Funds

Transcription

1 Market Risk Management for Hedge Funds Foundations of the Style and Implicit Value-at-Risk Francois Due and Yann Schorderet WILEY A John Wiley & Sons, Ltd., Publication

2 Acknowledgements xv 1 Introduction 1 PART I FUNDAMENTALS FOR STYLE AND IMPLICIT VALUE-AT-RISK 7 2 Ongoing Institutionalization 2.1 Hedge Fund Industry Size and Asset Flows 2.2 Style Distribution Structural Developments Geography, Listing, Independent Arbitrators and Back Office 2!3.2 Pricing arid Side Pockets 2.4 Are Hedge Founds Becoming Decent? Improved Market Efficiency Transfer of Risk Liquidity Suppliers, Captive Capital? The Black Sheep of Capitalism? 2.5 Funds of Hedge Funds Persistence Conditional Persistence Interquartile Spreads 3 Heterogeneity of Hedge Funds 3.1 Testing Sample 3.2 Smoothing Effect of a Restrictive Classification

3 3.3 Heterogeneity Revealed through Modern Cluster Analysis Modern Cluster Analysis Measures of a Classification Empirical Comparison Consequence For Value-at-Risk 3.4 Appendix A: Indices Sample Active and Passive Hedge Fund Indices 4.1 Illusions Fostered by Active Hedge Fund Indices The Illusion of Achieving Purity The Illusion of Representativeness The Illusion of Optimality 4.2 Passive Indices and the Illusion of being Clones Mechanical Replication Exposure Replication Replication of Distributions 4.3 Conclusion 5 The Four Dimensions of Risk Management for Hedge Funds > 5.1 Operational and Structural risk Sources of Structural Risk 5.2 Risk Control 5.3 Delegation Risk Market Risk Risk Controls 5.4 Direct Investment Risk Underlying Approach Strategy Risk Approach Overlapping Approaches 5.5 Conclusion 5.6 Appendix B: Risks Embedded with Some Classical Alternative Strategies Pure Short Selling Long/Short Equity Convertible Arbitrage Fixed Income Arbitrage Risk Arbitrage

4 xi 5.7 Appendix C: Other Common Hedge Funds Risks Leverage Risk Liquidity Risk Counter-Party Risk Specific Event Risk PART II STYLE VALUE-AT-RISK 6 The Original Style VaR Revisited 6.1 The Multi-Index Model The Sharpe (1988) Model Application to Hedge Funds Hedge Funds Indices as Risk Factors 6.2 The Style Value-at-Risk The Value-at-Risk Model Original Backtesting 6.3 Backtesting Revisited Fundamentals of an Updated Backtesting Updated Exception Rate Sources of Risk Underestimation 7 The New Style Model 7.1 Extreme Value Theory The Generalized Pareto Distribution Parameter Estimation.J.I.3 Method Selection Extreme Quantiles to Value the Risk Assessing the Risk of Hedge Funds Dealing with Autocorrelation 7.2 Risk Consolidation Hybrid EVT Approach Tail Dependence Location Parameters Extreme Value-at-Idiosyncratic-Risk 7.3 The New Style Model The Model Backtesting 7.4 Appendix D: Algorithms for the Elemental Percentile Method 7.5 Appendix E: Copulas

5 8 Annualization Problem Annualization of the Main Statistical Indicators Assuming i.i.d Annualization of the Mean Annualization of Volatility Annualization of Skewness Annualization of the Kurtosis Coefficient Annualization of Coefficients above the Fourth Order of Magnitude Application to Finance Annualization of Value-at-Risk Assuming i.i.d Annualization of Normal Value-at-Risk Annualization of Value-at-Risk for Leptokurtic Distributions Annualization of Cornish-Fisher Value-at-Risk Annualization of Value-at-Risk Based on Historical Percentiles Annualization Without Assuming i.i.d Annualization of Extreme Value Theory Value-at-Risk Annualization of GARCH Value-at-Risk Applications to the Style Value-at-Risk Appendix F: Annualization of Excess Kurtosis Appendix G: Drost and Nijrhan Theorem 177 PART III IMPLICIT VALUE-AT-RISK The Best Choice Implicit Value-at-Risk Alternative Style Analysis and BCI Model Theoretical Framework of BCIM Implicit Factors Coefficient of Determination and Independent Variables Automatic Selection of the Best Choice Implicit Model Best Choice Implicit VaR Empirical Tests Quality of the BCI Model 196

6 9.4.2 Backtesting Steadiness BCI Model and Hedge Fund Clones The Ten-Factor Model The Non-Linear Model Risk Budgeting Value-at-Risk of a Multi-Managers Portfolio Style Model Best Choice Implicit Model Risk Decomposition:'Before and After'Attribution Risk Decomposition: Closed form Attribution New Style Attribution BCIM Attribution Value-at-Risk Monitoring Analysing Graveyards and Hedge Funds Demise The Probit Model Empirical Evidence Return and Volatility 218 ' Value-at-Risk Implications for Portfolio Management Beyond Value-at-Risk , Liquidity Crisis and Hedge Funds Mechanical Stress Test Liquidity-Adjusted Value-at-Risk Non-Myopic Risk Measures Liquidity Adjustment Based on Replication Limit of Liquidity-Adjusted Value-at-Risk and Liquidity Scenario 230 Bibliography 233 Index 239