Download or read book Tail Risks Across Investment Funds written by Jerchern Lin and published by . This book was released on 2016 with total page 67 pages. Available in PDF, EPUB and Kindle. Book excerpt: Managed portfolios are subject to tail risks, which can be either index level (systematic) or fund-specific. Examples of fund-specific extreme events include those due to big bets or fraud. This paper studies the two components in relation to compensation structure in managed portfolios. A simple model generates fund-specific tail risk and its asymmetric dependence on the market, and makes predictions for where such risks should be concentrated. The model predicts that systematic tail risks increase with an increased weight on systematic returns in compensation and idiosyncratic tail risks increase with the degree of convexity in contracts. The model predictions are supported with empirical results. Hedge funds are subject to higher idiosyncratic tail risks and Exchange Traded Funds exhibit higher systematic tail risks. In skewness and kurtosis decompositions, I find that coskewness is an important source for fund skewness, but fund kurtosis is driven by cokurtosis, as well as volatility comovement and residual kurtosis, with the importance of these components varying across fund types. Investors are subject to different sources of skewness and fat tail risks through delegated investments. Volatility based tail risk hedging is not effective for all fund styles and types.
Download or read book TAIL RISK HEDGING Creating Robust Portfolios for Volatile Markets written by Vineer Bhansali and published by McGraw Hill Professional. This book was released on 2013-12-27 with total page 272 pages. Available in PDF, EPUB and Kindle. Book excerpt: "TAIL RISKS" originate from the failure of mean reversion and the idealized bell curve of asset returns, which assumes that highly probable outcomes occur near the center of the curve and that unlikely occurrences, good and bad, happen rarely, if at all, at either "tail" of the curve. Ever since the global financial crisis, protecting investments against these severe tail events has become a priority for investors and money managers, but it is something Vineer Bhansali and his team at PIMCO have been doing for over a decade. In one of the first comprehensive and rigorous books ever written on tail risk hedging, he lays out a systematic approach to protecting portfolios from, and potentially benefiting from, rare yet severe market outcomes. Tail Risk Hedging is built on the author's practical experience applying macroeconomic forecasting and quantitative modeling techniques across asset markets. Using empirical data and charts, he explains the consequences of diversification failure in tail events and how to manage portfolios when this happens. He provides an easy-to-use, yet rigorous framework for protecting investment portfolios against tail risk and using tail hedging to play offense. Tail Risk Hedging explores how to: Generate profits from volatility and illiquidity during tail-risk events in equity and credit markets Buy attractively priced tail hedges that add value to a portfolio and quantify basis risk Interpret the psychology of investors in option pricing and portfolio construction Customize explicit hedges for retirement investments Hedge risk factors such as duration risk and inflation risk Managing tail risk is today's most significant development in risk management, and this thorough guide helps you access every aspect of it. With the time-tested and mathematically rigorous strategies described here, including pieces of computer code, you get access to insights to help mitigate portfolio losses in significant downturns, create explosive liquidity while unhedged participants are forced to sell, and create more aggressive yet tail-risk-focused portfolios. The book also gives you a unique, higher level view of how tail risk is related to investing in alternatives, and of derivatives such as zerocost collars and variance swaps. Volatility and tail risks are here to stay, and so should your clients' wealth when you use Tail Risk Hedging for managing portfolios. PRAISE FOR TAIL RISK HEDGING: "Managing, mitigating, and even exploiting the risk of bad times are the most important concerns in investments. Bhansali puts tail risk hedging and tail risk management under a microscope--pricing, implementation, and showing how we can fine-tune our risk exposures, which are all crucial ways in how we can better weather our bad times." -- ANDREW ANG, Ann F. Kaplan Professor of Business at Columbia University "This book is critical and accessible reading for fiduciaries, financial consultants and investors interested in both theoretical foundations and practical considerations for how to frame hedging downside risk in portfolios. It is a tremendous resource for anyone involved in asset allocation today." -- CHRISTOPHER C. GECZY, Ph.D., Academic Director, Wharton Wealth Management Initiative and Adj. Associate Professor of Finance, The Wharton School "Bhansali's book demonstrates how tail risk hedging can work, be concretely implemented, and lead to higher returns so that it is possible to have your cake and eat it too! A must read for the savvy investor." -- DIDIER SORNETTE, Professor on the Chair of Entrepreneurial Risks, ETH Zurich
Download or read book Convex Incentives and Tail Risk Taking written by Jerchern Lin and published by . This book was released on 2016 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines how convexity in incentives affects tail risks across and within different types of investment funds. The literature has documented different forms of convexity that a fund manager faces: discounts in closed-end funds, tournaments and fund flow-performance relation in open-end funds, and high-water mark provisions in hedge funds. Sorting funds by the degree of convexity and comparing skewness between the group with the most convexity and the group with the least convexity, we conclude that convexity affects fund tail risks. This result suggests that both implicit and explicit convexities provide incentives for fund managers to take systematic and idiosyncratic bets with tail risks.
Download or read book Tail Risk Management written by Frank Benham and published by . This book was released on 2013 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: Since the height of the Global Financial Crisis in 2008, institutional investors have spent considerable time investigating ways to limit the downside risk in their portfolios. The term “Black Swan” has been used extensively to classify hard-to-identify, but impactful, events that cause “tail risks” in investors' portfolios. Investor timeframes and constraints differ and, thus, the decision of whether and how to hedge these risks will vary for investors. In this paper, we discuss the nature of tail risks and evaluate at a high level the options available to institutional investors. We determine that managing tail risk can be done strategically or tactically, primarily through asset allocation, derivative overlay strategies, or through tail risk hedge funds. Importantly, each approach will have an associated cost, either explicit or implicit, and we discuss the trade-offs for each approach.
Download or read book Tail Risk Hedging written by Andrew Rozanov and published by . This book was released on 2014 with total page 304 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Tail Risk and the Cross Section of Mutual Fund Expected Returns written by Nikolaos Karagiannis and published by . This book was released on 2018 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: We test for the presence of a tail risk premium in the cross-section of mutual fund returns and find that the top tail risk quintile of funds outperforms the bottom by 4.4% per annum. This premium is not simply a reward for market risk, nor do commonly used risk factors offer an adequate explanation. Our findings hold across double-sorted portfolios formed on tail risk and a number of fund characteristics. We also find that funds susceptible to tail risk tend to be small, young, have high management fees, and have managers who do not risk their own capital.
Download or read book Tail Risk of Hedge Funds written by Gregor Aleksander Gawron and published by Cuvillier Verlag. This book was released on 2007 with total page 150 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Option Implied Tail Risk Timing by Hedge Funds and Performance written by Jung Soon Shin and published by . This book was released on 2018 with total page 67 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper focuses on an unexplored dimension of fund managers' timing ability: market-wide tail risk implied by information in options markets. We investigate whether hedge fund managers can strategically time market tail risk implied by options through adjusting their portfolios' market exposure to changes in market tail risk. Using an extensive sample of 6,147 equity-oriented hedge funds over the period 1996 to 2012, we find strong evidence of tail risk timing ability of hedge fund managers. We conduct bootstrap analysis and confirm that our tail risk timing ability is not attributed to pure luck. Furthermore, tail risk timing ability brings significant economic value to investors. Specifically, in out-of-sample tests, top-ranked hedge funds outperform bottom-ranked funds by 5-7% annually after adjusting for common risk factors. Also, we find that managers' tail risk timing skill persists over time, suggesting that hedge fund managers' tail risk timing ability reflects true managerial skill. Our overall results are robust to various hedge fund characteristics, subsample or sub-period analysis, the use of alternative timing abilities, and other hedge funds' managerial skills. Our empirical examination emphasizes the role of market-wide option-implied tail risk in hedge fund managers' skill and their performance.
Download or read book Tail Risk Exposures of Hedge Funds written by Caio Almeida and published by . This book was released on 2019 with total page 31 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines tail risk in the Brazilian hedge fund industry. We rely on a unique data set of daily returns for every hedge fund in Brazil, dead or alive. By employing the universe of hedge funds, we ensure the absence of selection, survivorship, and instant history biases. We estimate tail risk measures based on the cross-section of both equity and hedge-fund returns. We consider three tail risk measures. The first extracts a tail risk measure assuming that the tail of the cross-section distribution has a power law representation, whereas the second and third rely on the expected shortfall of the cross-section distribution under the physical and risk-neutral measures, respectively. We find that the tail risk estimates are very different not only across asset classes (equity vs hedge fund), but also across probability measures (physical vs risk neutral). More interestingly, we also show that, although the hedge fund industry in Brazil seems to exhibit more exposure to equity tail risk, hedge fund tail risk entails higher predictive ability to performance both over time and cross-sectionally.
Download or read book High Returns from Low Risk written by Pim van Vliet and published by John Wiley & Sons. This book was released on 2017-01-17 with total page 180 pages. Available in PDF, EPUB and Kindle. Book excerpt: Believing "high-risk equals high-reward" is holding your portfolio hostage High Returns from Low Risk proves that low-volatility, low-risk portfolios beat high-volatility portfolios hands down, and shows you how to take advantage of this paradox to dramatically improve your returns. Investors traditionally view low-risk stocks as safe but unprofitable, but this old canard is based on a flawed premise; it fails to see beyond the monthly horizon, and ignores compounding returns. This book updates the thinking and brings reality to modelling to show how low-risk stocks actually outperform high-risk stocks by an order of magnitude. Easy to read and easy to implement, the plan presented here will help you construct a portfolio that delivers higher returns per unit of risk, and explains how to achieve excellent investment results over the long term. Do you still believe that investors are rewarded for bearing risk, and that the higher the risk, the greater the reward? That old axiom is holding you back, and it is time to start seeing the whole picture. This book shows you, through deep historical simulation, how to reap the rewards of smarter investing. Learn how and why low-risk, low-volatility stocks beat the market Discover the formula that outperforms Greenblatt's Construct your own low-risk portfolio Select the right ETF or low-risk fund to manage your money Great returns and lower risk sound like a winning combination — what happens once everyone is doing it? The beauty of the low-risk strategy is that it continues to work even after the paradox is widely known; long-term investment success is possible for anyone who can shake off the entrenched wisdom and go low-risk. High Returns from Low Risk provides the proof, model and strategy to reign in your exposure while raking in the profit.
Download or read book Risk Based and Factor Investing written by Emmanuel Jurczenko and published by Elsevier. This book was released on 2015-11-24 with total page 488 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book is a compilation of recent articles written by leading academics and practitioners in the area of risk-based and factor investing (RBFI). The articles are intended to introduce readers to some of the latest, cutting edge research encountered by academics and professionals dealing with RBFI solutions. Together the authors detail both alternative non-return based portfolio construction techniques and investing style risk premia strategies. Each chapter deals with new methods of building strategic and tactical risk-based portfolios, constructing and combining systematic factor strategies and assessing the related rules-based investment performances. This book can assist portfolio managers, asset owners, consultants, academics and students who wish to further their understanding of the science and art of risk-based and factor investing. Contains up-to-date research from the areas of RBFI Features contributions from leading academics and practitioners in this field Features discussions of new methods of building strategic and tactical risk-based portfolios for practitioners, academics and students
Download or read book Investment Fund Risk written by Peter G. Dunne and published by . This book was released on 2017 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: Efforts to develop risk assessment metrics for the non-bank financial sector have been given impetus following the post-crisis broadening of the IMF's Financial Stability Assessments and recent efforts by the Financial Stability Board to address structural vulnerabilities from asset management activities. Using a novel database of investment funds reporting in Ireland, we employ marginal expected shortfall metrics to capture investment fund exposures to pervasive industry-wide tail events. We reveal the primary fund sectors most responsible for widespread return shortfalls. Fund attributes are then used to explain (mostly) the cross-sectional variation in marginal expected shortfall using panel regression techniques. We find that leverage, derivative usage, redemption rates, cash holdings, openness and retail investor focus are important factors that consistently explain the variation in fund-specific sensitivity to pervasive tail risk. The trade-off between ex ante exposure to widespread extreme negative outcomes and fund performance is also explored.
Download or read book Hedge Funds written by Vikas Agarwal and published by Now Publishers Inc. This book was released on 2005 with total page 85 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Download or read book Swing Pricing and Fragility in Open end Mutual Funds written by Dunhong Jin and published by International Monetary Fund. This book was released on 2019-11-01 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: How to prevent runs on open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds’ net asset values to pass on funds’ trading costs to transacting shareholders. Using unique data on investor transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces redemptions during stress periods. The positive impact of alternative pricing rules on fund flows reverses in calm periods when costs associated with higher tracking error dominate the pricing effect.
Download or read book The Tail Risk of Hedge Fund Returns written by and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: I test whether recently proposed, stock market-based tail risk measures explain hedge fund returns. The tail risk measures are TAIL (Kelly and Jiang; 2014), LBVIX (Agarwal, Arisoy, and Naik; 2014), VVIX (Park; 2013), and variations of these measures. The hedge fund data is a variety of hedge fund indices and different samples of individual hedge funds drawn from the Lipper/TASS database. Using EUR-denominated stocks and hedge funds instead of USD-denominated stocks and hedge funds, I test the results of Kelly and Jiang (2012) by applying their methodology to the Eurozone. The results are qualitatively identical, lending support to the claim that TAIL is a risk factor for hedge funds. On the other hand, I find evidence against the claim that TAIL suitably represents tail risk. Incorporating a weighting factor for the stocks' market capitalizations in the calculation of TAIL leads to a more plausible but very different evolution of TAIL and reverses the effect of TAIL in the cross-section of hedge fund returns. Ultimately, no evidence remains for the claim that exposure to tail risk is compensated with higher overall returns. In the second part of this paper, I replicate the results of Agarwal, Arisoy, and Naik (2014) and perform additional robustness tests that confirm the relevance of the second-order volatility measure LBVIX for hedge fund returns. These results extend to the VVIX as an alternative, non-investable measure of second-order volatility. Hedge funds that are more negatively exposed to second-order volatility achieve higher average excess and alpha returns. Following Park (2013), I decompose VVIX into the integrated volatility of volatility (IVV) and the jump variation (VJUMP). This decomposition allows a further and novel analysis of the relationship between second-order volatility and hedge fund returns. I find that it is not the exposure to volatility jumps but to diffusive movements in volatility that is negative.
Download or read book Tail Risk in Hedge Funds written by Vikas Agarwal and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Fat Tail Risk in Portfolios of Hedge Funds and Traditional Investments written by Jean-Francois Bacmann and published by . This book was released on 2004 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: We analyse the risk of portfolios mixing hedge funds, stocks and bonds. The risk of the portfolios is quantified by the Value-at-Risk and the Expected Shortfall derived from the Extreme Value Theory. This approach enables us to take the impact of higher moments into account. We show that the risk of a traditional portfolio is reduced by the inclusion of hedge funds. An optimal weight of 50% hedge funds is found when the traditional portfolio is mostly composed of bonds. In equity dominated portfolios, investors should incorporate as much hedge funds as possible. Furthermore we examine the extremal dependence between funds of hedge funds and stocks or bonds using multivariate Extreme Value Theory. We do not find any significant extremal dependence between hedge funds and bonds. The evidence is more mixed between stocks and funds of hedge funds. Funds of hedge funds without a significant investment in Managed Futures exhibit significant dependence in the extreme with the stock market. The August 1998 event linked to the Russian crisis and the LTCM failure is the cause of this dependence.
