Market Risk Management for Hedge Funds: Foundations of the Style and Implicit Value-at-Risk

Acknowledgements

1 Introduction

Part I Fundamentals for Style and Implicit Values-at-Risk

2 Ongoing Institutionalization

2.1 Hedge funds industry size and asset flows

2.2 Style distribution

2.3 2006-2007 structural developments

2.4 Are hedge funds becoming decent?

2.5 Funds of hedge funds persistence

3 Heterogeneity of Hedge Funds

3.1 Testing sample

3.2 Smoothing effect of a restrictive classification

3.3 Heterogeneity revealed through Modern Cluster Analysis

3.4 Appendix A: Indices sample

4 Active and Passive Hedge Fund Indices

4.1 Illusions fostered by active hedge fund indices

4.2 Passive indices and the illusion of being clones

4.3 Conclusion

5 The Four Dimensions of Risk Management for Hedge Funds

5.1 Operational and structural risk

5.2 Risk control

5.3 Delegation risk

5.4 Direct investment risk

5.5 Conclusion

5.6 Appendix B: Risks embedded with some classical alternative strategies

5.7 Appendix C: Other common risks to hedge funds

Part II Style Value-at-Risk

6 The Original Style VaR Revisited 77

6.1 The Multi-Index Model

6.2 The Style Value-at-Risk

6.3 Backtesting revisited

7 The New Style Model

7.1 Extreme Value Theory

7.2 Risk consolidation

7.3 The New Style Model

7.4 Appendix D: Algorithms for the elemental percentile method

7.5 Appendix E: Copulas

8 Annualization Problem

8.1 Annualization of the main statistical indicators assuming i.i.d.

8.2 Annualization of Value-at-Risk assuming i.i.d.

8.3 Annualization without assuming i.i.d.

8.4 Applications to the Style Value-at-Risk

8.5 Appendix F: annualization of excess kurtosis  

8.6 Appendix G: Drost and Nijman Theorem

Part III Implicit Value-at-Risk

9 The Best Choice Implicit Value-at-Risk

9.1 Alternative style analysis and BCI Model

9.2 Theoretical framework of BCIM

9.3 Best Choice Implicit VaR

9.4 Empirical Tests

10 BCI Model and Hedge Fund Clones

10.1 Ten-Factor Model

10.2 Non-Linear Model

11 Risk Budgeting

11.1 Value-at-Risk of a multi-managers portfolio

11.2 Risk decomposition: 'before and after' attribution

11.3 Risk decomposition: closed form attribution

12 Value-at-Risk Monitoring

12.1 Analyzing graveyards and hedge funds demise

12.2 The probit model

12.3 Empirical evidence

12.4 Implications for portfolio management

13 Beyond Value-at-Risk

13.1 2007–2008 liquidity crisis and hedge funds

13.2 Mechanical stress test

13.3 Liquidity-adjusted Value-at-Risk

13.4 Limit of liquidity-adjusted Value-at-Risk and liquidity scenario

Bibliography

Index