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TinMan
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Tail risk for Hedge funds

March 3rd, 2012, 5:00 pm

QuoteOriginally posted by: edouard 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?So what does short tail risk mean?
 
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TinMan
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Tail risk for Hedge funds

March 3rd, 2012, 5:06 pm

QuoteOriginally posted by: britannia 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)..That makes no sense. Long or short refers to your position, not your assumed distribution.By your logic a hedge fund that buys as asset and one that sells an asset are both 'long tail risk'.Google Neiderhoffer and Taleb.
 
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britannia
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Joined: December 25th, 2002, 1:14 pm

Tail risk for Hedge funds

March 3rd, 2012, 5:12 pm

correction, the last point should have read;Dear All, Please do correct me if I am wrong; the fact that most hedge funds are EXPOSURED 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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TinMan
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Tail risk for Hedge funds

March 3rd, 2012, 5:23 pm

Try reading the answers rather than endlessly rephrasing your proposition.
 
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britannia
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Joined: December 25th, 2002, 1:14 pm

Tail risk for Hedge funds

March 3rd, 2012, 5:29 pm

@ TinMan: no need to insult .. this is a civil discussion ..
 
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TinMan
Posts: 613
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Tail risk for Hedge funds

March 3rd, 2012, 6:20 pm

That was no insult and I was perfectly civil.I was on the other hand blunt. Which is the appropriate response in this case.
 
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daveangel
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Tail risk for Hedge funds

March 4th, 2012, 9:45 am

QuoteOriginally posted by: britanniacorrection, the last point should have read;Dear All, Please do correct me if I am wrong; the fact that most hedge funds are EXPOSURED 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)..Are you posing a hypothesis ? I would suggest that you look at some empirical data first - perhaps get the returns from broad hedge fund indices and specific strategy indices and then test your hypothesis.
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gnp1020
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Joined: February 24th, 2012, 10:03 pm

Tail risk for Hedge funds

March 7th, 2012, 4:23 pm

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.This is a good example.... Inherently, there is tail risk in any strategy. The examples above show what happens when those tail risks aren't properly hedged. I don't think the more successful hedge funds leave their tail risks exposed given the lessons we've learned from others mistakes ^^^ Those who made money on crisis 08 made big bets on those tail risks (of general market) materializing. Hope this simplifies / clarifies for you. Not completely sure of what you're trying to get at here.
 
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daveangel
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Tail risk for Hedge funds

March 7th, 2012, 4:39 pm

QuoteI don't think the more successful hedge funds leave their tail risks exposed given the lessons we've learned from others mistakes ^^^ by successful I think you mean luckyQuote Hope this simplifies / clarifies for you. Not completely sure of what you're trying to get at here. I am sure acastaldo can speak for himself, but I am pretty sure he didn't need you to clarify or simplify things for him.
Last edited by daveangel on March 7th, 2012, 11:00 pm, edited 1 time in total.
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farmer
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Tail risk for Hedge funds

March 8th, 2012, 12:32 pm

QuoteOriginally posted by: MartinghoulYeah, there's all sorts among hedge funds, I would say...Without any statistics to go on, I would be comfortable guessing that more than 51% of hedge funds are trend-following in nature. This means they are exposed to small and frequent occurrences of non-normality. Does this also make them generally beneficiaries, rather than victims, of extreme events? For the most strictly technical trend-following subset, I think yes. And the larger group of hedge funds as a whole still compares favorably with the primary category of investments, that being long equity ownership, when it comes to tail risk.
 
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SierpinskyJanitor
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Tail risk for Hedge funds

March 8th, 2012, 2:05 pm

The "Lipper/TASS Database" has (some) data, which Andrew Lo´s team used to extract tangible intel from. His book clearly explains how the "survivorship bias" skews any attempt to make meaningful conclusions though, so the whole exercise is borderline useful.... IMO(and experience) there´s only one way to really understand how HFs make $ - you gotta work for them.
Last edited by SierpinskyJanitor on March 7th, 2012, 11:00 pm, edited 1 time in total.
 
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Martinghoul
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Tail risk for Hedge funds

March 8th, 2012, 2:31 pm

There's quite a bit of more recent research on the subject. My favorite is stuff that's written by Tarun Ramadorai et al. See, for example, this:Change you can believe in
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