Di Cesare, A., Stork, P. and de Vries, C.G. (2015). Risk Measures for Autocorrelated Hedge Fund Returns Journal of Financial Econometrics, 13(4):868--895.
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Affiliated authorPhilip Stork
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Publication year2015
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JournalJournal of Financial Econometrics
Standard risk metrics tend to underestimate the true risks of hedge funds because of serial correlation in the reported returns. Getmansky, Lo, and Makarov (2004) derive mean, variance, Sharpe ratio, and beta formulae adjusted for serial correlation. Following their lead, we derive adjusted downside and global measures of individual and systemic risks. We distinguish between normally and fat-tailed distributed returns and show that adjustment is particularly relevant for downside risk measures in the case of fat tails. An empirical analysis reveals that unadjusted risk measures can considerably underestimate the true extent of individual and systemic risks for hedge funds.