Hedge Funds : Hedge Fund

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Hedge fund industry, one of the fastest growing sectors in the financial service industry, has been attracting high net-worth and major institutional investors such as large pension funds and university endowments due to its distinctive characteristics. With a rapid rate of growth, the hedge fund industry also attracts attention of academics. They have analysed the performance of hedge funds from different perspectives and implied the necessity of further researches on hedge funds’ capital adequacy. In 2000, Fung and Hsieh used a mean-variance approach to study hedge fund exposures in some major market events. They analysed hedge fund performance during turbulent market times. But due to limitations of their research methodology, they…show more content…
They showed that under the assumption of normal portfolio returns, reward-to-VaR ratio and Sharpe ratio give the same ranking of portfolio performance. While under non-normality, the rankings are different. Agarwal (2004) reached important conclusions that some hedge fund strategies have payoffs similar to “a short position in a put option on the market index”, and a traditional mean-variance framework tends to ignore this risk. Using mean-conditional VaR framework, Agarwal examined the extent to which the mean-variance approach underestimates the left tail risk. Though the analysis on risk characteristics of hedge funds has a huge impact on hedge fund managers and market participants, very few studies related to capital adequacy of hedge funds have been done. Gupta and Liang’s (2005) paper is “the first one to address capital adequacy and risk estimation issues in the entire hedge fund industry”. They used the VaR approach to study capital requirements for almost 1500 hedge funds and found that only a small amount of funds are undercapitalized as of March 2003. Del Brio, Monra-Valencia and Perote (2014) further compared the performance of risk measures using three approaches: parametric distributions, semi-nonparametric methodologies and the extreme value theory approach. They showed that the extreme value theory approach accurately forecast hedge fund VaR. From the implication of
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