Risk Measures for Autocorrelated Hedge Fund Returns

Di Cesare, Antonio; Stork, Philip A.; de Vries, Casper G.

doi:10.2139/ssrn.1828662

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Risk Measures for Autocorrelated Hedge Fund Returns

44 Pages Posted: 2 May 2011

See all articles by Antonio Di Cesare

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Casper G. de Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute)

There are 2 versions of this paper

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

Di Cesare, Antonio and Stork, Philip A. and De Vries, Casper, Risk Measures for Autocorrelated Hedge Fund Returns (May 2, 2011). Available at SSRN: https://ssrn.com/abstract=1828662 or http://dx.doi.org/10.2139/ssrn.1828662