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Hedge Fund Tail Risk

Hedge Fund Tail Risk

Chapter:
(p.154) (p.155) 4 Hedge Fund Tail Risk
Source:
Quantifying Systemic Risk
Author(s):
Tobias AdrianMarkus K. BrunnermeierHoai-Luu Q. Nguyen
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226921969.003.0006

This chapter uses quantile regressions to examine the interdependencies between different hedge fund styles in times of crisis. It shows that tail sensitivities between different strategies are higher in times of distress, suggesting the potential for simultaneous losses across many hedge funds; identifies seven risk factors related to these tail dependencies; and shows that offloading this risk significantly reduces the sensitivities. However, consistent with existing literature, it is also shown that these factors explain a large part of hedge funds' expected returns. The chapter provides evidence suggesting that capital flows across strategies and over time reward those which load more heavily on the tail risk factors. A commentary is also included at the end of the chapter.

Keywords:   hedge fund strategies, tail risk exposure, tail dependencies, capital flow, tail risk factors

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