Post by Sapphire Capital on Jul 15, 2008 20:01:37 GMT 4
Measuring Hedge Fund Risks
SABRINA KHANNICHE
Universite Paris X Nanterre
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Icfai University Journal of Financial Risk Management, Vol. V, No. 2, pp. 50-69, June 2008
Abstract:
This research paper shows that volatility is an incomplete measure of hedge fund risks, and the Sharpe ratio is also not a reliable index of risk-adjusted performance. The paper uses a dataset of monthly hedge fund index returns provided by TASS, to investigate risk and performance. It demonstrates that hedge funds are highly attractive according to the mean-variance approach. However, they lose most of their attraction when skewness and kurtosis are taken into account. Jarque-Bera test of the normality of hedge fund returns rejects the hypothesis of normality for all the hedge fund categories except Equity Market Neutral and Managed Futures. Consequently, Sharpe ratios overestimate the performance of hedge funds. It also reveals that Equity Market Neutral is the best strategy in term of returns, standard deviation, Sharpe ratio, skewness and kurtosis.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1141084
SABRINA KHANNICHE
Universite Paris X Nanterre
--------------------------------------------------------------------------------
Icfai University Journal of Financial Risk Management, Vol. V, No. 2, pp. 50-69, June 2008
Abstract:
This research paper shows that volatility is an incomplete measure of hedge fund risks, and the Sharpe ratio is also not a reliable index of risk-adjusted performance. The paper uses a dataset of monthly hedge fund index returns provided by TASS, to investigate risk and performance. It demonstrates that hedge funds are highly attractive according to the mean-variance approach. However, they lose most of their attraction when skewness and kurtosis are taken into account. Jarque-Bera test of the normality of hedge fund returns rejects the hypothesis of normality for all the hedge fund categories except Equity Market Neutral and Managed Futures. Consequently, Sharpe ratios overestimate the performance of hedge funds. It also reveals that Equity Market Neutral is the best strategy in term of returns, standard deviation, Sharpe ratio, skewness and kurtosis.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1141084