Risk Measures for Autocorrelated Hedge Fund Returns
44 Pages Posted: 2 May 2011
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Risk Measures for Autocorrelated Hedge Fund Returns
Date Written: May 2, 2011
Abstract
Standard risk metrics tend to underestimate the true risks of hedge funds because of serial correlation in the reported returns. Getmansky et al. (2004) derive mean, variance, Sharpe ratio, and beta formulae adjusted for serial correlation. Following their lead, adjusted downside and global measures of individual and systemic risks are derived. We distinguish between normally and fat tailed distributed returns and show that adjustment is particularly relevant for downside risk measures in the case of fat tails. A hedge fund case study reveals that the unadjusted risk measures considerably underestimate the true extent of individual and systemic risks.
Keywords: Hedge funds, Serial correlation,Systemic risk, VaR, Pareto distribution
JEL Classification: G12, G23, G28
Suggested Citation: Suggested Citation
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