Cesare, Antonio Di Stork, Philip A. de Vries, Casper G.
Year of Publication:
Tinbergen Institute Discussion Paper 11-084/2/DSF 23
Standard risk metrics tend to underestimate the true risks of hedge funds becauseof serial correlation in the reported returns. Getmansky et al. (2004) derive mean,variance, Sharpe ratio, and beta formulae adjusted for serial correlation. Followingtheir lead, adjusted downside and global measures of individual and systemic risksare derived. We distinguish between normally and fat tailed distributed returnsand show that adjustment is particularly relevant for downside risk measures in thecase of fat tails. A hedge fund case study reveals that the unadjusted risk measuresconsiderably underestimate the true extent of individual and systemic risks.
Hedge funds Serial correlation Systemic risk VaR Pareto distribution.