Regensburg 2007 – scientific programme

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AKSOE: Arbeitskreis Physik sozio-ökonomischer Systeme

AKSOE 14: Financial Markets and Risk Management III

AKSOE 14.2: Talk

Thursday, March 29, 2007, 14:30–15:00, H8

Downside Risk metrics for Hedge Funds: an empirical and a theoretical approach — •Josep Perelló — Departament de Física Fonamental, Universitat de Barcelona, Spain

Hedge Funds are considered as one of the portfolio management sectors which shows a fastest growing for the past decade. An optimal Hedge Fund management requires an appropriate risk metrics. The classic CAPM theory and its Ratio Sharpe fail to capture some crucial aspects due to the strong non-Gaussian character of Hedge Funds statistics. A possible way out to this problem while keeping CAPM simplicity is the so-called Downside Risk analysis. One important benefit lies in distinguishing between good and bad returns, that is: returns greater or lower than investor's goal. We revisit most popular Downside Risk indicators and provide new analytical results on them. We compute these risk measures by taking the Credit Suisse/Tremont Investable Hedge Fund Index Data. A rather unusual transversal lecture of the existing Downside Risk measures is also provided. We study the Gaussian, the Laplace and the power law distributions in the Downside Risk framework and comment their abilities to get a proper picture of the Hedge Fund universe.