The applicability of mean-variance analysis and beta-factors in the risk assessment of hedge funds

Boehlandt, Florian (2007-12)

Thesis (MBA) -- Stellenbosch University, 2007.

Thesis

ENGLISH ABSTRACT: Hedge funds are amongst the fastest growing types of investment funds, both in tenns of worldwide assets under management, as well as the number of private and institutional investors. More recently, analysts and investors focussed their attention on accurately estimating the inherent risks of hedge funds (e.g, Brooks & Kat, 2001; Fung & Hsieh, 2004). Past research suggests that the traditional approach of assessing the risks of investment funds through mean-variance analysis can lead to severe underestimation of left-hand-tail risks for hedge funds (Amenc, Malaise, Martellini & Vaissie, 2004; Favre & Galeano, 2002; Fung & Hsieh, 1999). This phenomenon is mainly attributab le to the non-normal distribution of monthly hedge fund returns around the mean. In addition, it has been found that skewed return distribution with high excess kurtosis has substantial impact on the rel iability of beta as a measure of systemic risk in hedge funds (Chan, Getmansky, Haas & Lo, 2005). Other problems when estimating hedge fund risks arise from serial correlation of time series (Getmansky, Lo & Makarov, 2003), managerial and survivorship bias (Amin & Kat, 2001 ), as well as spurious bias when estimating performance from economic time series (Fung & Hsieh, 2000). The following thesis provides statistical evidence of the limitations of traditional risk measures when applied to hedge fund investments. It also includes advice on how to improve the significance of the aforementioned risk measures. In the course of the mean-variance analysis, the applicability and reliability of Value at Risk as a risk measurement tool for hedge funds is explored. Furthennore, the reliability and accuracy of different univariate and multivariate regression models is tested. In the final chapter emphasis is placed on the possibilities of predicting the inherent risks of single funds from hedge fund style index performance. This should provide investors and analysts with an introductory framework for the appropriate risk assessment of hedge funds, considering the unique structure and dynamics of these alternative investment funds.

AFRIKAANSE OPSOMMING: Skansfondse tel onder die vinnigste groeiende tipes beleggingsfondse in terme van sowel wereldwye bates onder bestuur as die aantal private en institusionele beleggers. OnJangs het analiste en beleggers hulle aandag daarop begin toespits om die inherente risiko's verbonde aan skansfondse akkuraat te bereken (Brooks & Kat. 2001; Fung & Hsieh, 2004). Vroeere navorsing het daarop gedui dat die tradisioncle benadering om die risiko's verbonde aan beleggingsfondse deur gemiddeldevariansie-analise te takseer, daartoe kan lei dat linkerkantse-eindrisiko's verbonde aan skansfondse emstig onderskat word (Fung & Hsieh, 1999; Favre & Galeano, 2002; Amenc. Malaise, Martellini & Vaissie, 2004). Hierdie verskynsel is hoofsaaklik toe te skryf aan die abnonnale verspreiding van maandeliksc skansfondsopbrengste rondom die gemiddelde. Boonop is bevind dat skewe verdeling met hoe kurtose-oorskryding aansienlik inslaan op die betroubaarheid van beta as 'n meting van sistemiese risiko by skansfondse (Chan. Getmansky. Haas & Lo, 2005). Ander probleme by die raming van skansfondsrisiko's spruit uit tydreekskorrelasie (Getmansky, Lo & Markov, 2003), bestuurs- en oorlewingsydigheid (Amin & Kat, 2002) en vals sydigheid by die beraming van prestasie uil die ekonomiese tydsreeks (Fung & Hsieh, 2000). Hierdie tesis gaan statistiese bewyse lewer van die tradisioncle risikometings se beperkings wanneer dit op skansfondsbeleggings toegepas word. Verder sal daar raad gegee word oor hoe om die beduidendheid van die genoemde risikometings te verbeter. In die loop van die gemiddeldevariansie-analise sal die toepasbaarheid en betroubaarheid van die Waarde onder Risiko as 'n risikometing vir skansfondse ondersoek word. Voorts sal die betroubaarheid en akkuraatheid van verskillende ecnvariaat- en meervariaatregressiemodelle getoets word. In die laaste hoofstuk val die klem op die moontlikheid om die inherente risiko's van enkelfondse aan die hand van 'n skansfondstipe-indeksprestasie te voorspel. Wat hier volg, behoort beJeggers en analistc van 'n inleidende raamwerk vir die toepaslike risikotaksering van skansfondse - met inagneming van die unieke struktuur en dinamika van hierdie altcmatiewe beleggingsfondse - te voorsien.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/19812
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