Market Risk Management for Hedge Funds: Foundations of the Style and Implicit Value-at-Risk

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Index

absolute returns 4, 9–11

achieving purity, illusions concepts

48–9

acquisitions see merger...

active hedge fund indices 2–3, 4, 45–68

AIMA 31, 59

alpha 34, 63, 65, 66, 75–6, 144–5

alternative funds 1–5

see also hedge funds

alternative investment styles

BCIM 182–6

concepts 13–14, 19–20, 26–7, 33–4,

76–8, 85–92, 114–17, 129–37,

182–6

Altvest 32, 41

annual style distributions of the testing

periods in percent, statistics 13–14,

32–3

annualization issues

concepts 155–78

Cornish–Fisher Value-at-Risk 167–9,

171–2

EVT 171–2, 175–8, 196–8

GARCH Value-at-Risk 172–4, 177–8,

227–8

historical Value-at-Risk 169–71

leptokurtic distributions 159–62,

164–7

main statistical indicators 157–62

Value-at-Risk 161–78

approximation errors 157–78

arbitrage 13–14, 19, 33, 34–5, 41–3, 49,

52–3, 56–9, 76–8, 88–9, 102–17,

129–37, 183–6, 229–31

see also relative-value strategies

arbitrage on the underlying, derivatives

57

asset classes, concepts 69–70, 101–3,

184

asset flow statistics 11–13

asset-backed securities 224

asymmetry of returns 2, 64, 94–5,

158–62

see also skewness

auto-regressive approach, hedge funds

62

autocorrelation, concepts 131–6,

184

automated selection approaches 3–4,

181–205

see also Best Choice . . .

average silhouette

concepts 38–41

definition 38

Baa/treasury spread 200, 229–30

back office developments 14–15

backtesting, Value-at-Risk 104–17,

144–5, 147–50, 196–8

Barclay . . . 10, 41

Basel Committee 115–16, 155

BB rated bonds 58–9

BCIM see Best Choice Implicit Model

bear markets 25–30

‘before and after’ risk attribution, risk

decomposition 30, 211–12

benchmark/relative performance bubble

9–11

benchmarks 9–30, 46, 64–5, 66–8,

219–21

239

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240 Index

Best Choice Implicit Model (BCIM)

see also Implicit . . .

alternative style analysis 182–6

automatic selection 192–3

backtesting 196–8

clones 199–205

coefficient of determination 190–205

concepts 3–4, 5, 30, 181–205, 207–14

empirical tests 195–8

implicit factors 187–90, 196–8

independent variables 190–2

non-linear model 202–5

quality issues 196–8

risk budgeting 207–14

steadiness considerations 198

ten-factor model 199–202

theoretical framework 186–93

betas 18, 26–7, 32, 34, 56, 61, 63, 65,

75–6, 101–2, 182–4, 194–8,

210–14, 230–1

biases 33, 34–5, 41–3, 67–8, 76–8,

85–6, 102, 105–17, 119–20

bibliography 233–8

Billion Dollar Club 12–13

binomial distribution 115–16, 128

bisection method 150–1

Bivariate Extreme Value Theory 139–42

boards of directors 14–15

bonds 19, 33, 34–5, 41–3, 52, 56–8,

76–8, 88–90, 94–5, 102–17,

129–37, 161–78, 183–6, 200–5,

224

convertible arb style 13–14, 33, 34–5,

41–3, 52, 56–8, 76–8, 88–9,

102–17, 129–37, 183–6, 229–31

credit ratings 58–9, 224

fixed income style 13–14, 33, 34–5,

41–3, 52, 76–8, 89–90, 94–5,

129–37, 183–6, 230–1

square root of time rule 161–78

Bretton Woods 223

bull markets 25–30

businesscyclerisk(BUS),riskmatrix77

business processes

see also structural risk

concepts 71–5

call options 94, 202–5

capitalism 22–3

capitalization issues 21–2, 55–6, 57–8,

86–7

Cash-Flow-at-Risk 224–5

catastrophe risks 54, 107

CDOs see collateral debt obligations

CESR 46

Chapter 11 bankruptcy protection 20

chi-squared tests 25–6

CISDM 41, 60, 62–3

City World GVT AM 162–78

classifications of hedge funds, concepts

31–43, 49–51, 59, 61, 182–4, 187,

221

Clayton copula 153–4

cliquet products 70–1

clones 2–3, 5, 11, 40–1, 47, 56–68,

199–205, 230–1

see also replication

BCIM 199–205

conclusions 64–8

funds of funds 62–3, 66–8

closed deals, merger arbitrage 57–8

closed form risk attribution, risk

decomposition 212–14

closed hedge funds 53–4

coefficient of determination 181–205

coefficients above the fourth order of

magnitude, annualization issues

160–2

collateral debt obligations (CDOs) 58–9,

224

commodities 20–1, 56–7, 63, 200–3

conditional distributions, unconditional

distributions 155

confidence levels, Style Value-at-Risk

Model 99–100, 119, 130, 184–6

contrarian strategies 82

convertible arb style 33, 34–5, 41–3, 52,

56–8, 76–8, 88–9, 102–17, 129–37,

183–6, 229–31

annual style distributions of the

testing periods in percent 13–14, 33

backtesting 106–17, 148–50

betas 183–6

EVT 129–37, 148–50

intra-correlations/inter-correlations

34–5

mechanical replication 56–8

risk management 76–7, 88–9,

114–17

copulas, concepts 136–45, 151–4

Cornish–Fisher expansion,

Value-at-Risk 167–9, 171–2

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Index 241

correlation

concepts 33–6, 77, 138–42, 146, 154,

184, 187–98

critique 138–9

risk matrix 77

counter-party risk, concepts 93

covariance 2, 103–4, 138–9, 189–90,

217–18

cpr see cross-product ratio

credit crunch 10–11, 20–1, 224–5

see also liquidity . . .

credit ratings, bonds 58–9, 224

credit risk (CRT), concepts 1, 75–8,

88–9, 224

credit spreads 88–9, 227–31

cross-gamma effects 71

cross-product ratio (cpr) 24–30

CS/Tremont hedge fund indices 3,

13–14, 26–7, 32–6, 39–40, 42,

53–4, 55–6, 64–5, 76–7, 102–3,

105–17, 120, 128–36, 147–50,

162–78, 182–6, 219–21, 226–30

CSFB 54

CTAs 13–14, 56–7, 63, 76–8, 129–37,

183–6

see also managed futures style

CTs 56–7, 63

data mining 4

database exits, fund managers 13,

215–21

de Picciotto, Edgar 223–4, 226–7

dead funds 215–21

dedicated short bias style 13–14, 33,

34–5, 41–3, 76–8, 85–6, 102,

106–17, 129–37, 141, 148–50,

183–6, 230–1

annual style distributions of the

testing periods in percent 13–14, 33

backtesting 106–17, 148–50

betas 183–6

EVT 129–37, 148–50

intra-correlations/inter-correlations

34–5

risk matrix 76–7

delegated index selections, institutional

investors 65

delegation risk

see also credit...;liquidity...;

market...

concepts 70–1, 75–8, 83–5

delta hedging 82–3

derivatives 15–16, 19–20, 57, 60, 72–4

Deutsche Borse 17

Diez de los Rios and Garcia (2006)

model 202–5

direct investment risk, concepts 78–85

direct lending, concepts 20–1, 73–4

disclosures 79–81

see also transparency issues

dispersion products 70–1

distressed securities 52, 72–3

distributions, replication 63–4

diversification levels 1, 26–8, 30, 36,

56–7, 61–2, 65, 79–80, 85–6,

184–6, 207–8

diversified CTA, mechanical replication

56–7

dot.com crisis 223–4

Dow Jones Convertible Bond investable

index 48, 64

downside deviation, concepts 2

Drost and Nijman theorem 172–4,

177–8

due diligence, concepts 1–2, 66–7,

69–70, 72–3, 83–5

dynamic trading strategies 76–83,

99–100

EDHEC indices 42, 45–6, 51, 55–6, 62,

107–8

elemental percentile method (EPM),

concepts 122, 124–37, 150–1

emerging markets style 13–14, 33, 35,

41–3, 76–8, 102, 106–17, 129–37,

203–5, 230–1

annual style distributions of the

testing periods in percent 13–14, 33

backtesting 106–17, 148–50

EVT 129–37, 148–50

intra-correlations/inter-correlations 35

risk matrix 76–7

endowments 11–13

EPM see elemental percentile method

equities

convertible arb style 13–14, 33, 34–5,

41–3, 52, 56–8, 76–8, 88–9,

102–17, 129–37, 183–6, 229–31

square root of time rule 161–78

equity market neutral style 9, 13–14, 27,

33–5, 41–3, 52, 76–8, 87–8, 102,

106–17, 129–37, 148–50, 230–1