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TinMan
Posts: 613
Joined: September 21st, 2006, 9:42 am

### Tail risk for Hedge funds

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?

TinMan
Posts: 613
Joined: September 21st, 2006, 9:42 am

### Tail risk for Hedge funds

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.

britannia
Topic Author
Posts: 76
Joined: December 25th, 2002, 1:14 pm

### Tail risk for Hedge funds

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)..

TinMan
Posts: 613
Joined: September 21st, 2006, 9:42 am

### Tail risk for Hedge funds

britannia
Topic Author
Posts: 76
Joined: December 25th, 2002, 1:14 pm

### Tail risk for Hedge funds

@ TinMan: no need to insult .. this is a civil discussion ..

TinMan
Posts: 613
Joined: September 21st, 2006, 9:42 am

### Tail risk for Hedge funds

That was no insult and I was perfectly civil.I was on the other hand blunt. Which is the appropriate response in this case.

daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

### Tail risk for Hedge funds

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.
knowledge comes, wisdom lingers

gnp1020
Posts: 2
Joined: February 24th, 2012, 10:03 pm

### Tail risk for Hedge funds

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.

daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

### Tail risk for Hedge funds

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.
knowledge comes, wisdom lingers

farmer
Posts: 13472
Joined: December 16th, 2002, 7:09 am

### Tail risk for Hedge funds

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.

SierpinskyJanitor
Posts: 1069
Joined: March 29th, 2005, 12:55 pm

### Tail risk for Hedge funds

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.

Martinghoul
Posts: 3255
Joined: July 18th, 2006, 5:49 am

### Tail risk for Hedge funds

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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