The Effect of Shortfall as a Risk Measure for Portfolios with Hedge Funds

Abstract:  Current research suggests that the large downside risk in hedge fund returns disqualifies the variance as an appropriate risk measure. For example, one can easily construct portfolios with nonlinear pay-offs that have both a high Sharpe ratio and a high downside risk. This paper examines the consequences of shortfall-based risk measures in the context of portfolio optimization. In contrast to popular belief, we show that negative skewness for optimal mean-shortfall portfolios can be much greater than for mean-variance portfolios. Using empirical hedge fund return data we show that the optimal mean-shortfall portfolio substantially reduces the probability of small shortfalls at the expense of an increased extreme crash probability. We explain this by proving analytically under what conditions short-put payoffs are optimal for a mean-shortfall investor. Finally, we show that quadratic shortfall or semivariance is less prone to these problems. This suggests that the precise choice of the downside risk measure is highly relevant for optimal portfolio construction under loss averse preferences.     

Persistent Doubt: An Examination of Hedge Fund Performance

We examine whether performance persistence is suspicious. Top quintile portfolios formed on the Sharpe ratio, alpha, and information ratio persistently outperform similarly constructed mediocre third quintile portfolios throughout our sample period, but performance is more modest and less persistent when portfolios are formed on the excess manipulation‐proof performance measure (EMPPM). By selecting funds formed on ranking by Sharpe and information ratios, investors also select funds that have persistently doubtful performance according to the doubt ratio. In contrast, portfolios formed on alphas and especially the EMPPM have much less excess and persistent doubt.     

中国期货价格的时变跳跃性及对现货价格影响的研究

期货价格受到异常消息的影响会发生跳跃行为,本文通过构建ARMAJI-GARCH模型刻画了我国金属期货的自相关性、条件异方差性以及动态跳跃性,并分析其跳跃行为对现货市场的影响。经研究表明,期货价格具有时变跳跃特征,铜期货的跳跃强度受到滞后一期跳跃强度的显著影响,铝期货的跳跃强度不仅受到自身滞后的影响,还受到跳跃强度残差的影响;当期和滞后一期的期货跳跃强度均对现货的收益率和波动性形成影响,期货价格的跳跃行为起到价格发现的作用。     

中国黄金与行业股票市场的动态相关性研究——基于DCC-GARCH模型

利用2015—2023年的黄金AU9999与十个上证行业指数日收益率数据,建立DCC-GARCH模型来分析动态相关性并计算最优投资权重和最优对冲比率。实证结果发现,黄金与行业股票市场存在动态相关性;黄金市场对十个行业的避险和对冲作用有差异,市场极端情况下黄金与行业指数均高度负相关,熊市期间黄金与原材料以外的九个行业具有不同程度负相关,黄金与工业、可选消费等七个行业长期具有负相关性;黄金平均权重在主要消费行业占比最高,原材料行业的对冲比率最高。最后提出资产组合纳入黄金、持续评估和区分行业进行风险管理的建议。     

Hedge Fund Regulation and Misreported Returns

This paper introduces a cross‐country law and finance analysis of the misreporting behaviour in the hedge fund industry in terms of smoothing returns so that a fund consistently generates positive returns. We find strong evidence that international differences in hedge fund regulation are significantly associated with the propensity of fund managers to misreport monthly returns. We find a positive association between wrappers and misreporting, particularly for funds that do not have a lockup provision. Also, we find some evidence that misreporting is less common among funds in jurisdictions with minimum capitalisation requirements and restrictions on the location of key service providers. We assess the robustness of our finds to a number of specifications, including, different specifications of misreporting bin widths, subsets of the data by fund type, as well as specifications controlling for collinearity and selection effects and other robustness checks. We show misreporting significantly affects capital allocation, and calculate the wealth transfer effects of misreporting and relate this wealth transfer to differences in hedge fund regulation.     

Equity market neutral hedge funds and the stock market: an application of score-driven copula models

In this article, we study the time-varying market neutrality of equity market neutral hedge funds. We use data from the Hedge Fund Research? Equity Market Neutral Index (HFRX EH), which represents the performance of a portfolio of individual equity market neutral hedge funds. For each day, we measure different levels of association of the Standard and Poor’s 500 (S&;P 500) index and the HFRX EH. We use non-linear dynamic conditional score models of location, scale and copula that, to the best of our knowledge, have not yet been applied in the body of literature on hedge funds. We study whether the neutrality of the HFRX EH that is evidenced in the body of literature for the period of April 1993–April 2003 also holds for the following decade, for the period of May 2003–December 2016. We estimate different average levels of association for the pre-, during- and post-periods of the US financial crisis of 2008. We find that the association of the S&;P 500 and the HFRX EH, on average, is significantly positive for the pre- and post-periods of the financial crisis, and it is significantly negative for the period during the financial crisis.     

On a symmetrization of diffusion processes

The latter author, together with collaborators, proposed a numerical scheme to calculate the price of barrier options. The scheme is based on a symmetrization of diffusion processes. The present paper aims to give a basis to the use of the numerical scheme for Heston and SABR-type stochastic volatility models. This will be done by showing a fairly general result on the symmetrization (in multi-dimension/multi-reflections). Further applications (to time-inhomogeneous diffusions/ to time-dependent boundaries/to curved boundaries) are also discussed.     

Market volatility and the dynamic hedging of multi-commodity price risk

Commodity cash and futures prices experienced a severe boom-and-bust cycle between 2006 and 2009. Increases in commodity price volatility have raised concerns about the usefulness of commodity futures and options as risk management tools. Dynamic hedging strategies have the potential to improve risk management when conditional (co)variances depart significantly from their unconditional, long-run counterparts and may be useful to decision-makers despite their greater complexity and higher transaction costs. We propose a Nonparametric Copula-based Generalized Autoregressive Conditional Heteroscedastic (NPC-GARCH) approach to estimate time-varying hedge ratios, and evaluate the benefits of dynamic hedging during four sub-periods between 2000 and 2011 using a stylized Texas cattle feedlot management problem. The NPC-GARCH approach allows for a flexible, nonlinear and asymmetric dependence structure between cash and futures prices for different commodities. We find that NPC-GARCH dynamic hedging performs better than either static, GARCH-Dynamic Conditional Correlation (DCC) or GARCH-Baba, Engle, Kraft and Kroner (BEKK) hedging in terms of lower tail risk (expected shortfall), but that there is no significant difference between hedging approaches in terms of portfolio variance reduction.     

Hedging effectiveness of fertilizer swaps

The fertilizer swaps market is a potential tool to protect against fertilizer price risk. The swaps evaluated here are cash settled using The Fertilizer Index. Hedge ratios and hedging effectiveness are calculated for urea and DAP diammonium phosphate (DAP)) swaps. Urea and DAP swaps perform poorly as a hedging tool over a one-week horizon. As the hedging horizon increases, the hedging effectiveness of swaps improves. The swaps are more effective in mitigating risk across ocean freight routes than across inland routes. The limited hedging effectiveness is due to high spatial basis risk in fertilizer markets.     

财产保险对国民经济总量和经济波动性的影响——基于套期保值模型与中国的实证

财产保险与国民经济之间存在何种内在联系一直是理论界探索的重要问题。文章创造性地将产险的套期保值原理与考虑了灾害损失的宏观经济模型相结合,得出了一定条件下财产保险对国民经济影响的数量模型。通过比较我国东、中、西部三个具有区域代表性省份的相关实证结果,进一步发现在前期投资功能受到限制的条件下,即使在区域特征明显的地区也呈现一个共同规律:尽管财产保险对经济总量不会产生明显影响,但对促进经济的平稳运行却能起到十分重要的作用。