Measuring Risk in the Hedge Fund Sector

Hedge funds -- private investment partnerships that are not directly regulated -- have grown in importance in recent years. The ongoing concerns about hedge fund vulnerability, coupled with the rapid growth of the funds, underscore the importance of understanding risk in this sector. A key determina...

Full description

Saved in:
Bibliographic Details
Published inCurrent issues in economics and finance Vol. 13; no. 3; p. 1
Main Author Tobias, Adrian
Format Journal Article
LanguageEnglish
Published New York Federal Reserve Bank of New York 01.03.2007
Subjects
Bias
Correlation analysis
Hedge funds
Investment policy
Risk assessment
Securities markets
Standard deviation
Studies
Volatility
Online AccessGet full text

Cover

More Information
Summary:Hedge funds -- private investment partnerships that are not directly regulated -- have grown in importance in recent years. The ongoing concerns about hedge fund vulnerability, coupled with the rapid growth of the funds, underscore the importance of understanding risk in this sector. A key determinant of hedge fund risk is the degree of similarity between the trading strategies of different funds. There are many ways to assess the similarity of hedge fund strategies. One standard measure of the comovement of hedge fund returns is covariance. The covariance across a group of funds essentially captures the extent to which their returns move together in dollar terms. The analysis of the relationship between hedge fund risk and comovement of returns generally produces no statistical evidence that increases in hedge fund correlations precede rises in hedge fund volatility. However, it was found that increases in hedge fund covariances tend to precede elevations in volatility.
ISSN:1936-2374
2163-4513