A comparison of alternative approaches for determining the downside risk of hedge fund strategies

Abstract

In this study, we compare a number of different approaches for determining the Value at Risk (VaR) and Expected Shortfall (ES) of hedge fund investment strategies. We compute VaR and ES through both model-free and mean/variance and distribution model-based methods. Certain specifications of the models that we considered can technically address the typical characteristics of hedge fund returns such as autocorrelation, asymmetry, fat tails, and time-varying variances. We find that conditional mean/variance models coupled with appropriate Downside Risk of Hedge Fund Strategies 245Journal of Futures Markets DOI: 10.1002/fut assumptions on the empirical distribution can improve the prediction accuracy of VaR. In particular, we observed the highest prediction accuracy for the predictions of 1% VaR. We also find that the goodness of ES prediction models is primarily influenced by the distribution model rather than the mean/variance specification.

Measuring market risk in financial and freight markets

“…predict the realized losses. Giamouridis and Ntoula (2009) compares 1-day 95% and 99% VaR and expected shortfall forecasts on eight hedge fund research investable strategy indices 55 obtained from the following VaR models: the historical simulation with estimation samples of 125 and 250 observations, the GARCH with normal innovations, the filtered historical simulation, the Cornish Fisher and the filtered peaks over threshold models. Evaluation is conducted in terms of backtesting and comparisons of theoretical to actual coverage rates.…”

Αξιολόγηση επενδυτικών στρατηγικών για την διαμόρφωση δυναμικών χαρτοφυλακίων Hedge Funds

“…et al (2007),Giamouridis and Ntoula (2009) Li andKazemi (2007) which show that the hedge fund strategies returns exhibit time varying volatilities, significant persistence, mean reversion and asymmetric effects. The univariare return x k,t for asset k is given by:…”