PORTFOLIO CONSTRUCTION, WHITE PAPERS

Back-test results on Stress-VaR and ex ante volatility

by Riskdata, 2012

This Riskdata Research note examines the relationship between Hedge-Fund Returns and the Peak-To-Valley (P2V). The study was implemented using the Portfolio Designer – an optimization algorithm developed by Riskdata – and applied to 100 random allocations on 359 Hedge funds reporting to Hedge Fund Research (www.hedgefundresearch.com). The simulations followed a rigorous “out-of-sample” protocol spanning the last 10 years. The goal was to reduce the Peak-to-Valley by 2 through two risk mitigation strategies: one based on ex-ante Volatility (eaVol), and the other using the Stress VaR (SVaR). The results were then adjusted to account for mortality bias.