Although risk management has been a well-plowed field in financial modeling for more than two decades, traditional risk management tools such as mean–variance analysis, beta, and Value-at-Risk do not capture many of the risk exposures of hedge-fund investments. In this article, I review several unique aspects of risk management for hedge funds—survivorship bias, dynamic risk analytics, liquidit...

Theoretical research predicted that firms with convex tax schedules would hedge to minimize expected taxes. However, previous empirical research did not detect a relationship between derivative use and tax losses carry forward, which contribute to tax schedule convexity. This study aims to show that the tax incentive to hedge depends on tax losses carry forward and the ability of the firm to ca...

The Sharpe ratio is adequate for evaluating investment funds when the returns of those funds are normally distributed and the investor intends to place all his risky assets into just one investment fund. Hedge fund returns differ significantly from a normal distribution. For this reason, other performance measures for hedge fund returns have been proposed in both the academic and practiceorient...

Life insurance products often contain embedded options in the form of profit sharing and guaranteed returns on premiums deposited by the customer. The value of these embedded options is exposed to market risks. This thesis describes a method to find good hedge portfolios of swaptions to hedge the market risks of the embedded options. In addition, a method is described to monitor and clarify the...

All hedge funds are not created equal. A poorly chosen portfolio of hedge funds can produce disappointing results. All fund of funds managers are not created equal, either. A poor choice of fund of funds managers can yield disappointing results. This article is designed to outline the value proposition of a fund of hedge funds operation. We conclude that fund of funds add value primarily throug...

This paper examines a large, nearly universal sample of hedge fund activism between January 1, 2003 and December 31, 2005. Hedge fund activism is when a hedge fund files a 13D filing after taking an initial stake of 5 percent or more in the company, and clearly states in the filing’s “purpose” section that it intends to proactively influence management’s future decisions. We find that hedge fun...

We develop a model of hedge fund returns, which reflect the contractual relationships between a hedge fund, its investors and its prime brokers. These relationships are modelled as short option positions held by the hedge fund, wherein the “funding option” reflects the short option position with prime brokers and the “redemption option” reflects the short option position with the investors. Giv...

Hedge funds have gained popularity for increasing investment returns. We focus on the role of this asset category for longterm investors, with attention to rebalancing a portfolio of diversified assets. An investor must seek out securities with low correlations to traditional assets to maximize asset growth. Current hedge fund returns, as measured by average performance, show dependencies with ...

This article presents some new results on an unexplored dataset on hedge fund performance. The results indicate that hedge funds follow strategies that are dramatically different from mutual funds, and support the claim that these strategies are highly dynamic. The article finds five dominant investment styles in hedge funds, which when added to Sharpe’s (1992) asset class factor model can prov...

THE JOURNAL OF ALTERNATIVE INVESTMENTS 1 I n this article, we will review both academic and practitioner research from the standpoint of a hypothetical institutional investor who is looking into whether hedge funds make sense for their portfolio. Surveying the extensive hedge fund literature, it appears that there are six competing conceptual frameworks for how hedge funds should be incorporate...