Serving the Quantitative Finance Community

 
User avatar
Owais
Topic Author
Posts: 0
Joined: April 22nd, 2008, 10:58 am

VaR Fund of Funds

July 10th, 2012, 8:59 am

Portfolio of Hedge funds say 10 hedge funds in a portfolio (Options, bonds, stocks, FX long/Short) are asset classes, what do you think for estimating Portfolio VaR of such a portfolio, which method would you suggest?secondly if i am having fund of (100 funds) only NAV makes sense to calculate VaR? Thanks & RegardsO
 
User avatar
Owais
Topic Author
Posts: 0
Joined: April 22nd, 2008, 10:58 am

VaR Fund of Funds

July 10th, 2012, 3:02 pm

Anyone
 
User avatar
Hansi
Posts: 41
Joined: January 25th, 2010, 11:47 am

VaR Fund of Funds

July 10th, 2012, 6:13 pm

Never really looked at FoF stuff but for the first one given that you have the underlying positions etc. you can aggregate them but I can't see an aggregate number for such a broad portfolio having much useful information. More risk oriented people can give details on this but producing both a historical and simulated output might be the route you want to go for. You could do analytical for the options and the bonds but I'll leave how efficient that is to experts.On the second I can't see what that VaR value might in any way tell you.
 
User avatar
Owais
Topic Author
Posts: 0
Joined: April 22nd, 2008, 10:58 am

VaR Fund of Funds

July 11th, 2012, 4:09 am

Thanks Hansi for your reply :-)Looking at VaR will give me general idea under normal conditions how much should i expect to loose on my portfolio of FundsWill be great to see replies from risk experts on the forum
 
User avatar
riskguru
Posts: 0
Joined: August 11th, 2004, 4:24 pm

VaR Fund of Funds

July 12th, 2012, 4:00 pm

What level of transparency do you have into the individual funds? Position level, aggregate greeks, only returns? Will help define the problem better!
 
User avatar
Owais
Topic Author
Posts: 0
Joined: April 22nd, 2008, 10:58 am

VaR Fund of Funds

July 13th, 2012, 2:38 pm

Thanks riskguru for your replyLets Say Weekly NAV Data for six months only, transparency is also an issue.Now How would you go for risk measure RegardsO
 
User avatar
Hansi
Posts: 41
Joined: January 25th, 2010, 11:47 am

VaR Fund of Funds

July 13th, 2012, 4:41 pm

I wouldn't; it's to little info and short time to estimate that you can have any meaningful view of risk. Maybe look at EVT and total exposure obviously if you have to have any numeric values shown but it's still a number that doesn't really capture anything meaningful (EVT, total exposure is obviously meaningful).
Last edited by Hansi on July 12th, 2012, 10:00 pm, edited 1 time in total.
 
User avatar
Owais
Topic Author
Posts: 0
Joined: April 22nd, 2008, 10:58 am

VaR Fund of Funds

July 16th, 2012, 4:49 am

Hi riskgurucould you please add some points on this stuff? as wellHansi: Thanks for your responseO
 
User avatar
Anthis
Posts: 7
Joined: October 22nd, 2001, 10:06 am

VaR Fund of Funds

July 16th, 2012, 5:57 am

VaR assumptions require that the security is traded and the total of the position can be closed with one transaction at the end of the estimation horizon. So unless the funds in question meet these assumptions, which i doubt, they may have lock in periods and gates, then estimating VaR on them, is like trying to answer whats the VaR of your house.
 
User avatar
wannabexpert
Posts: 0
Joined: October 25th, 2011, 9:41 am

VaR Fund of Funds

July 16th, 2012, 8:29 am

Hi Anthis, what is this 'gates'? Can you please explain?Thanks,
 
User avatar
Hansi
Posts: 41
Joined: January 25th, 2010, 11:47 am

VaR Fund of Funds

July 16th, 2012, 9:46 am

QuoteOriginally posted by: wannabexpertHi Anthis, what is this 'gates'? Can you please explain?Thanks,Partial redemption restrictions?
 
User avatar
Aaron
Posts: 4
Joined: July 23rd, 2001, 3:46 pm

VaR Fund of Funds

July 16th, 2012, 11:03 pm

It cannot be done with the data you have, it would only be misleading.The best approach I can think of (and it's not very good) is to look at the losses from the fund categories during bad periods, adjust for the volatility of your funds, and add some idiosyncratic risk.For example, if an index of merger arb funds over 20 years has a monthly VaR of 3% and your merger arb fund has a monthly vol that is 80% of the index, you might guess a 2.4% VaR, plus add something for the idiosyncratic risk.For a portfolio, look at the returns for a vol and type matched portfolio of the index, and again add for idiosyncratic risk.That is better than trying to use your short historical data.
 
User avatar
Owais
Topic Author
Posts: 0
Joined: April 22nd, 2008, 10:58 am

VaR Fund of Funds

July 17th, 2012, 10:04 am

Many Thanks Aaron
 
User avatar
riskguru
Posts: 0
Joined: August 11th, 2004, 4:24 pm

VaR Fund of Funds

July 17th, 2012, 3:13 pm

I agree with Aaron. Given data limitations, I was going to respond saying you need to understand the risk/return characteristics of your underlying funds better (you have much more specific responses in Aaron's response). Separately, the link between a VaR calc and the fund's liquidity terms (partial redemptions etc) is tricky. Ultimately, I think this should be driven by the anticipated holding period of positions given their liquidity characteristics (and not fund liquidity characteristics). So for a long/short fund with one year lock, I would not use a one year holding period assumption on a VaR calc.