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Wiley InterScience | |||||||||||
  European Financial ManagementVolume 13 Issue 2, Pages 333 - 370 Published Online: 2 Mar 2007 © 2010 Blackwell Publishing Ltd Published in conjunction with the European Financial Management Association
Abstract | References | Full Text: HTML, PDF (Size: 1274K) | Related Articles | Citation Tracking  Risk Measures for Hedge Funds: a Cross-sectional Approach We thank Mila Getmansky, Daniel Giamouridis, Hossein Kazemi, Bernard J. Morzuch, and an anonymous referee for helpful comments and suggestions. We are responsible for any error. Copyright 2007 The Authors Journal compilation © 2007 Blackwell Publishing Ltd KEYWORDS
hedge funds
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expected shortfall
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tail risk
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conditional VaR
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Cornish-Fisher expansion
KEYWORDS
G11 •
G12 •
C31 Abstract
This paper analyses the risk-return trade-off in the hedge fund industry. We compare semi-deviation, value-at-risk (VaR), Expected Shortfall (ES) and Tail Risk (TR) with standard deviation at the individual fund level as well as the portfolio level. Using the Fama and French (1992) methodology and the combined live and defunct hedge fund data from TASS, we find that the left-tail risk captured by Expected Shortfall (ES) and Tail Risk (TR) explains the cross-sectional variation in hedge fund returns very well, while the other risk measures provide statistically insignificant or marginally significant results. During the period between January 1995 and December 2004, hedge funds with high ES outperform those with low ES by an annual return difference of 7%. We provide empirical evidence on the theoretical argument by Artzner et al. (1999) that ES is superior to VaR as a downside risk measure. We also find the Cornish-Fisher (1937) expansion is superior to the nonparametric method in estimating ES and TR. | 
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