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britannia
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Tail risk for Hedge funds

March 1st, 2012, 4:07 pm

Question; most hedge funds are long tail risk, what does this really mean - if tail risk increases the higher the gains?
 
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rmax
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Tail risk for Hedge funds

March 1st, 2012, 4:10 pm

My non received interpretation would be that they have big bets on massive moves in the market - similar to being long straddles.
 
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daveangel
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Tail risk for Hedge funds

March 1st, 2012, 4:19 pm

QuoteOriginally posted by: britanniaQuestion; most hedge funds are long tail risk, what does this really mean - if tail risk increases the higher the gains?I would humbly disagree with this proposition...
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Martinghoul
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Tail risk for Hedge funds

March 1st, 2012, 4:47 pm

Yeah, there's all sorts among hedge funds, I would say...
 
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rmax
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Tail risk for Hedge funds

March 1st, 2012, 6:02 pm

To clarify - I was interpreting the question, not saying whether the rhetoric was correct, and would agree with DA and M in terms of the answer...
 
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list
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Tail risk for Hedge funds

March 1st, 2012, 6:45 pm

QuoteOriginally posted by: britanniaQuestion; most hedge funds are long tail risk, what does this really mean - if tail risk increases the higher the gains?to be ' long tail risk' likely means that a buyer buys an asset as a speculator and intends to get profit during a next period of time. ' if tail risk increases the higher the gains' probably means that a chance to reach previously reasonable return remarkably decreased.
 
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Martinghoul
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Tail risk for Hedge funds

March 1st, 2012, 11:14 pm

QuoteOriginally posted by: listQuoteOriginally posted by: britanniaQuestion; most hedge funds are long tail risk, what does this really mean - if tail risk increases the higher the gains?to be ' long tail risk' likely means that a buyer buys an asset as a speculator and intends to get profit during a next period of time. ' if tail risk increases the higher the gains' probably means that a chance to reach previously reasonable return remarkably decreased.No and no....
 
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britannia
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Tail risk for Hedge funds

March 2nd, 2012, 12:41 am

@ MartinghouPlease offer some form of an exposition to your answer. I posed the question in order to learn, it wasn't just a proposition ..
Last edited by britannia on March 1st, 2012, 11:00 pm, edited 1 time in total.
 
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acastaldo
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Tail risk for Hedge funds

March 2nd, 2012, 2:48 am

Let's take a specific example: LTCM and its successor JWM Partners. They did well for a long time, then suffered big losses when a rarely occurring set of circumstances materialized. I suspect this is what people have in mind when they say "hedge funds are long tail risk" (i.e. they are exposed to tail risk). Of course as Martinghoul points out there are many different kinds of hedge funds so it is a bit hazardous to generalize from one well known example; the statement you quote seems a bit hasty.
Last edited by acastaldo on March 1st, 2012, 11:00 pm, edited 1 time in total.
 
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daveangel
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Tail risk for Hedge funds

March 2nd, 2012, 7:28 am

QuoteOriginally posted by: acastaldoLet's take a specific example: LTCM and its successor JWM Partners. They did well for a long time, then suffered big losses when a rarely occurring set of circumstances materialized. I suspect this is what people have in mind when they say "hedge funds are long tail risk" (i.e. they are exposed to tail risk). Of course as Martinghoul points out there are many different kinds of hedge funds so it is a bit hazardous to generalize from one well known example; the statement you quote seems a bit hasty.I would describe that as a short position rather than a long seeing as how you would lose money should the risk materialise... but hey what do I know ?
knowledge comes, wisdom lingers
 
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Martinghoul
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Tail risk for Hedge funds

March 2nd, 2012, 8:44 am

Yeah, I am with dave here...
 
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Collector
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Tail risk for Hedge funds

March 2nd, 2012, 9:30 am

most hedge funds are short tail risk I would thinksome are long tail risk, but all of them are short the far far out tail...I remember I once was in risk meeting, the BSD trader explained how he would make money in every scenario, but he said he would loose big if Alien invasion. So yes he was a good trader fully aware he was short the far far out tail, despite his system showing him long the tail.What part of the tail are you long is the right question. No one are long the whole tail. Do not also forget every person has limited capacity. Too much focus on tail risk and common everyday risk could become tail risk for you. I probably told this story before. I was walking in London with a professor very interested in tail risk, I was so excited, finally someone to discuss the deeper philosophy of the tails with. I got so excited about the far out tail discussion that I forgot to look for cars when crossing the street, and I was almost hit by one....
Last edited by Collector on March 1st, 2012, 11:00 pm, edited 1 time in total.
 
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daveangel
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Tail risk for Hedge funds

March 2nd, 2012, 9:35 am

Quote most hedge funds are short tail risk I would think most hedge funds are just short risk ... risk premium is their alpha source. not saying its a bad thing or a good thing.
knowledge comes, wisdom lingers
 
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tagoma
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Tail risk for Hedge funds

March 2nd, 2012, 8:54 pm

QuoteOriginally posted by: britanniaQuestion; most hedge funds are long tail risk, what does this really mean - if tail risk increases the higher the gains?couldn't this simply be an assertion reminding that every asset under management in HFs doesn't get normal returns?
 
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britannia
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Joined: December 25th, 2002, 1:14 pm

Tail risk for Hedge funds

March 3rd, 2012, 3:45 pm

Dear All, Please do correct me if I am wrong; the fact that most hedge funds are long tail risk is simply the that most of their returns are supposed to be idiosyncratic and that invariably subjects them to non-normal returns with fat tails. This assertion is a conjecture on my part. And also the volatility at the central part of the distribution does contributes to the probability of unexpected event occuring (i.e the tail)..
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