Press Releases
74% OF HEDGE FUNDS HAVE OPTIONS LIKE BEHAVIOUR, FINDS MASSIVE QUANTITATIVE STUDY
May 30, 2006
150 leading investors attend Riskdata-organised seminar in New York focused on specific risk management challenges in hedge fund investing
May 30, 2006 - The seminar “Risk Management for Hedge Fund Investors: Exploring the new state-of-the-art”, organised by leading risk solutions provider Riskdata, saw a large turnout of major institutional investors and asset managers concerned with the complex risk management and risk transparency issues involved in hedge fund asset class investing. The seminar heard differing perspectives from top industry figures Professor Emanuel Derman of Columbia (formerly Goldman Sachs’ chief quant), and Virginia Reynolds Parker of Parker Global Strategies.
At the seminar Riskdata’s research director Dr. Raphael Douady and Professor Derman unveiled the results of their massive quantitative study, which examined the non-linearities of hedge fund returns and tested the returns of 1,000 hedge funds over the last ten years, distributed across strategies in proportion to the hedge fund population, and including dead funds.
The methodology used was to select the investable factors that were the most explanatory of returns, testing quadratic and cubic regression versus linear regression. The key conclusions of the study are:
- 74% of the hedge funds exhibit non-linear, option-like behaviour. The most important source of non-linearity is, surprisingly, not especially the uses of derivatives, but much more often the dynamic trading strategies such as Market Timer, CTA, Statistical Arbitrage, or the sensitivity to liquidity traps, such as Merger Arbitrage.
- 75% of the hedge funds surveyed exhibit autocorrelation and lagged relationships with markets. Market shifts impact 45% of the funds with up to one month delay, while the most important source of autocorrelation is the illiquidity of the underlying assets, such as those used in Mortgage Backed Securities and Distressed strategies.
Dr Douady said: “This work we did with Professor Derman confirms in a crystal clear way that any risk analysis from the point of view of the investor must integrate three key patterns:
- The dynamic behaviour of the manager – ie the systematic portfolio changes in reaction to market events, as it is the main source of non-linearity
- The related option-like behaviour, meaning that the upside and the downside are asymmetrical, as well as the specific behaviour in extreme market situations, due to correlation breaks
- The possible lagged relation to the market, due to illiquidity in the assets and/or return smoothing.
“In particular, linear techniques used in the traditional fund industry are unsafe when applied to hedge funds and lead to illusory diversification, as they miss changing correlations under large market moves.”
In his presentation, Professor Emanuel Derman illustrated the relationship one can expect between the alpha of hedge funds managers and the lock up clause, through real option theory and a modified CPAM approach.
In the seminar, Virginia Parker, founder and President of Parker Global Strategies, concluded on the practical usage of quantitative analysis for risk management, in combination with qualitative approaches. She highlighted how her firm uses Riskdata’s FOFiX to monitor managers’ style and to control the fund of funds risk profile.
Olivier Le Marois, Chief Executive of Riskdata, added: “We at Riskdata strongly believe in quantitative analysis, because it is the only way to provide risk transparency, and risk transparency is the only way to facilitate the flow of institutional money over the long term into alternative investment – it provides the better risk control and oversight that makes such investment acceptable for institutional investors. This is the main reason why we have organized this seminar: as risk solutions providers, we are committed to support both institutional investors and the alternative investment industry in what we view as a strong and long term trend. Some may perceive that risk management in this space is really about marketing and regulatory compliance – we disagree. It’s clear from the response of our clients that we are filling an important gap to help investors get this crucial risk insight through a well controlled systematic quantitative approach.”
Copies of the full presentation are available from contacts below
About Riskdata
Riskdata’s team includes investment practitioners, risk management experts and I.T specialists. Its aim is to offer money managers easy, interactive and intuitive access to effective risk analysis. It is supported by leading figures, such as Professor Robert Mundell, a past winner of the Nobel Prize for Economics. Economics.
RiRiskdata is the first service offering a daily view on all market classes: equities, fixed-income, listed and OTC derivatives. As an interactive system, rather than classic ASP model, there is no exporting of clients’ positions while deployment is quick and simple.
Riskdata offers a comprehensive suite of solutions for Asset Managers, adapted to all investment styles: FOFiX for Fund of Funds, HEDGIX for Hedge funds, along with dedicated products for benchmarked funds.
For further information:
Press:
Fishburn Hedges
Andrew Marshall
Tel: +44 20 7839 4321
andrew.marshall@fishburn-hedges.co.uk
Riskdata America
10 E 40th St
New York
Tel: +1 212 931 57 94
Alex Fuchs, US marketing director alex.fuchs@riskdata.com
“The challenge for us was to get an aggregated view of the fund risk profile while tracking the specific risk of each underlying strategy. We think Riskdata is able to address both of these issues simultaneously. Moreover, we can monitor the impact of any portfolio allocation on the fund risk profile.”
Philippe Uzan,
CDC IXIS Multi-Strategy Fund
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