The Asymmetric Impact of Volatility Risk on Hedge Fund Returns PDF Download

Author: Jarkko Peltomaki
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
I investigate the asymmetric impact of volatility risk on returns of hedge fund strategies. I compare volatility risk exposures to price risk exposures by considering the causation between implied volatility and market returns. I also investigate whether the latest financial crises have caused structural changes in the risk exposures. My results indicate that the volatility risk is related to returns of most hedge fund strategies in a nonlinear way. Further, the use of volatility risk as a factor in hedge fund analysis suffers from asymmetry that is similar to the impact of price risk.

Author: Alexander M. Ineichen
Publisher: John Wiley & Sons
ISBN: 1118160606
Category : Business & Economics
Languages : en
Pages : 383

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Book Description
In Asymmetric Returns, financial expert Alexander Ineichen elevates the critical discussion about alpha versus beta and absolute returns versus relative returns. He argues that controlling downside volatility is a key element in asset management if sustainable positive compounding of capital and financial survival are major objectives. Achieving sustainable positive absolute returns are the result of taking and managing risk wisely, that is, an active risk management process where risk is defined in absolute terms and changes in the market place are accounted for. The result of an active risk management process-when successful-is an asymmetric return profile, that is, more and higher returns on the upside and fewer and lower returns on the downside. Ineichen claims that achieving Asymmetric Returns is the future of active asset management. Alexander M. Ineichen, CFA, CAIA, is Managing Director and Senior Investment Officer for the Alternative Investment Solutions team, a key provider within Alternative and Quantitative Investments, itself a business within UBS Global Asset Management. He is also on the Board of Directors of the Chartered Alternative Investment Analyst Association (CAIAA). Ineichen is the author of the two UBS research publications In Search of Alpha—Investing in Hedge Funds (October 2000) and The Search for Alpha Continues—Do Fund of Hedge Funds Add Value? (September 2001). As of 2006 these two reports were the most often printed research papers in the documented history of UBS. He is also author of the widely popular Absolute Returns—The Risk and Opportunities of Hedge Fund Investing, also published by John Wiley & Sons.

Author: Geert Bekaert
Publisher:
ISBN:
Category : Investments
Languages : en
Pages : 76

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Book Description
It appears that volatility in equity markets is asymmetric: returns and conditional volatility are negatively correlated. We provide a unified framework to simultaneously investigate asymmetric volatility at the firm and the market level and to examine two potential explanations of the asymmetry: leverage effects and time-varying risk premiums. Our empirical application uses the market portfolio and portfolios with different leverage constructed from Nikkei 225 stocks, extending the empirical evidence on asymmetry to Japanese stocks. Although volatility asymmetry is present and significant at the market and the portfolio levels, its source differs across portfolios. We find that it is important to include leverage ratios in the volatility dynamics but that their economic effects are mostly dwarfed by the volatility feedback mechanism. Volatility feedback is enhanced by a phenomenon that we term covariance asymmetry: conditional covariances with the market increase only significantly following negative market news. We do not find significant asymmetries in conditional betas.

Author: Ying Li
Publisher:
ISBN:
Category :
Languages : en
Pages : 29

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Book Description
Using daily returns on a set of hedge fund indices, we study (i) the properties of the indices' conditional density functions, (ii) the presence of asymmetries in conditional correlations between hedge fund indices and other investments and between hedge indices themselves, and (iii) the presence of market timing skills in the indices. We use the SNP approach to obtain estimates of conditional densities of hedge fund returns and then proceed to examine their properties. In general, a nonparametric GARCH(1,1) model appears to provide the best fit for all strategies. We find that the conditional third and fourth moments are significantly affected by changes in the current volatility of returns on hedge fund indices. We also examine changes in the conditional probability of tail events and report significant changes in the probability of extreme events when the conditioning information changes. These results have important implications for models of hedge fund risk that rely on probability of tail events. We formally test for the presence of asymmetries in conditional correlations to determine if there is contagion between hedge funds and other investments and between various hedge fund indices in extreme down markets versus extreme up markets. We do not find strong evidence in support of asymmetric correlations between hedge funds and other investments, while we find evidence in support of asymmetric correlations between some hedge fund indices. Finally, we find strong evidence supporting the presence of market timing skills in these indices. However, we argue that our findings are more likely to be because of long-volatility positions held by the managers rather than because of their market timing abilities. Further, we claim that the presence of option-type returns as explanatory variables are not likely to correct for this problem. We use market timing results concerning returns on a simulated portfolio to support this conclusion.

Author: Leola B. Ross
Publisher:
ISBN:
Category :
Languages : en
Pages : 24

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Book Description
In recent years, the number of firms offering hedge fund products, and assets allocated to hedge funds have grown at a rapid rate. This growth has been accompanied by a commensurate increase in the number of hedge fund research articles. A striking limitation of many analyses published to date is their focus on so-called indices, which in reality reflect the average returns of peer managers, categorized by investment style. We focus instead on individual manager return histories and investigate the relationship between individual manager performance and investable equity or fixed income market indexes. Our goal is to obtain reliable estimates of hedge funds' sensitivity to market returns, and to get a sense of the variability of outcomes across individual hedge fund managers of a given style.Using manager-level performance data from the Hedge Fund Research database, we refine and apply methods suggested in previous studies. Our approach has five notable features:- We correct for possible distortions in returns introduced by performance-based fees by using inferred gross-of-fees returns.- We regress individual manager returns on contemporaneous and lagged returns of broad market equity or fixed income indexes, as appropriate for the style of the manager being analyzed.- We correct for autocorrelation of residuals when appropriate.- We modify our regression models to detect differences in manager sensitivity to index returns in bull and bear markets.- We model participation-linked fees as call options and evaluate their impact on performance in a separate step.Our principal finding is that substantial variation in market-relative risk exists across managers within hedge fund style universes. Many of the style-level effects reported by other researchers were not observed in a majority of individual managers. This result suggests that informed manager selection helps investors avoid the unattractive performance characteristics identified by style-level analyses. Further, we find that the dramatic asymmetry noted by previous studies is largely a function of the volatility induced by the 1998 Russian Debt Crisis rather than some inherent asymmetry in hedge fund return patterns. For practitioners, the upshot is that designing a hedge fund strategy is an intensively bottom-up exercise. Generalizations at the style level are of little use when formulating a hedge fund strategy in the real world.

Author: Mrs.Anne Jansen
Publisher: International Monetary Fund
ISBN: 9781557757364
Category : Business & Economics
Languages : en
Pages : 92

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Book Description
Hedge funds are collective investment vehicles, often organized as private partnerships and resident offshore for tax and regulatory purposes. Their legal status places few restrictions on their portfolios and transactions, leaving their managers free to use short sales, derivative securities, and leverage to raise returns and cushion risk. This paper considers the role of hedge funds in financial market dynamics, with particular reference to the Asian crisis.

Author: Stephen Satchell
Publisher: Springer
ISBN: 1137554177
Category : Science
Languages : en
Pages : 416

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Book Description
Over the last 20 years hedge funds and derivatives have fluctuated in reputational terms; they have been blamed for the global financial crisis and been praised for the provision of liquidity in troubled times. Both topics are rather under-researched due to a combination of data and secrecy issues. This book is a collection of papers celebrating 20 years of the Journal of Derivatives and Hedge Funds (JDHF). The 18 papers included in this volume represent a small sample of influential papers included during the life of the Journal, representing industry-orientated research in these areas. With a Preface from co-editor of the journal Stephen Satchell, the first part of the collection focuses on hedge funds and the second on markets, prices and products.

Author: Mark Carey
Publisher: University of Chicago Press
ISBN: 0226092984
Category : Business & Economics
Languages : en
Pages : 669

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Book Description
Until about twenty years ago, the consensus view on the cause of financial-system distress was fairly simple: a run on one bank could easily turn to a panic involving runs on all banks, destroying some and disrupting the financial system. Since then, however, a series of events—such as emerging-market debt crises, bond-market meltdowns, and the Long-Term Capital Management episode—has forced a rethinking of the risks facing financial institutions and the tools available to measure and manage these risks. The Risks of Financial Institutions examines the various risks affecting financial institutions and explores a variety of methods to help institutions and regulators more accurately measure and forecast risk. The contributors--from academic institutions, regulatory organizations, and banking--bring a wide range of perspectives and experience to the issue. The result is a volume that points a way forward to greater financial stability and better risk management of financial institutions.

Author: Vikas Agarwal
Publisher: Now Publishers Inc
ISBN: 1933019174
Category : Business & Economics
Languages : en
Pages : 85

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Book Description
Hedge Funds summarizes the academic research on hedge funds and commodity trading advisors. The hedge fund industry has grown tremendously over the recent years. According to some industry estimates, hedge funds have increased from $39 million in 1990 to about $972 million in 2004 and the total number of hedge funds has gone up from 610 to 7,436 over the same period. At the same time, hedge fund strategies have changed significantly. In 1990 the macro strategy dominated the industry while in 2004 the equity hedge strategy had the largest share of the market. There has also been a shift in the type of investor in hedge funds. In the early 1990's the typical investor was a high net-worth individual investor, today the typical investor is an institutional investor. Thus, the hedge fund market has not only grown tremendously, but the nature of the market has changed. Despite the enormous growth of this industry, there is limited information available on hedge funds. As a result, there is a need for rigorous research from both the investors' and regulators' point of view. Investors need research to better understand their investment and their risk exposure. This research also helps investors recognize the extent of diversification benefits hedge funds offer in combination with investments in traditional asset classes, such as stocks and bonds. Regulators can use this research to identify situations where regulation may be needed to protect investors' interests and to understand the impact hedge funds trading strategies have on the stability of the financial markets. The first part of Hedge Funds summarizes hedge fund performance, including comparisons of risk-return characteristics of hedge funds with those of mutual funds, factors driving hedge fund returns, and persistence in hedge fund performance. The second part reviews research regarding the unique contractual features and characteristics of hedge funds and their influence on the risk-return tradeoffs. The third part reviews the role of hedge funds in a portfolio including the extent of diversification benefits and limitations of standard mean-variance framework for asset allocation. Finally, the authors summarize the research on the biases in hedge fund databases.

Author: Seungho Jung
Publisher: International Monetary Fund
ISBN: 1557759677
Category : Business & Economics
Languages : en
Pages : 36

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Book Description
We investigate how corporate stock returns respond to geopolitical risk in the case of South Korea, which has experienced large and unpredictable geopolitical swings that originate from North Korea. To do so, a monthly index of geopolitical risk from North Korea (the GPRNK index) is constructed using automated keyword searches in South Korean media. The GPRNK index, designed to capture both upside and downside risk, corroborates that geopolitical risk sharply increases with the occurrence of nuclear tests, missile launches, or military confrontations, and decreases significantly around the times of summit meetings or multilateral talks. Using firm-level data, we find that heightened geopolitical risk reduces stock returns, and that the reductions in stock returns are greater especially for large firms, firms with a higher share of domestic investors, and for firms with a higher ratio of fixed assets to total assets. These results suggest that international portfolio diversification and investment irreversibility are important channels through which geopolitical risk affects stock returns.