Review of Financial Studies Vol. 17 No. 1 2004
Risks and Portfolio Decisions Involving Hedge Funds
Abstract
This article characterizes the systematic risk exposures of hedge funds using buy-and-hold and option-based strategies. Our results show that a large number of equity-oriented hedge fund strategies exhibit payoffs resembling a short position in a put option on the market index and therefore bear significant left-tail risk, risk that is ignored by the commonly used mean-variance framework. Using a mean-conditional value-at-risk framework, we demonstrate the extent to which the mean-variance framework underestimates the tail risk. Finally, working with the systematic risk exposures of hedge funds, we show that their recent performance appears significantly better than their long-run performance.
- Volume
- 17
- Issue
- 1
- Pages
- 63-98
- Sources
- bibtex:phds-export.bib