Hedge Fund Tail Risk from Holdings and Trading Strategies

Summary

The document recommends research on how hedge fund tail risk relates to fund performance and where that risk originates. It points to a study of equity-oriented hedge funds that examines both the tail risk of stocks held by funds and the effects of funds’ dynamic trading strategies. The question also raises interest in decomposing tail exposure and understanding interactions among funds and with the broader market.

The cited study’s reported conclusion is that both holdings in stocks with high tail risk and dynamic trading strategies contribute to hedge fund tail risk. This offers a useful framework for separating exposure embedded in portfolio assets from risk associated with trading behavior. The document is a brief literature pointer rather than a full account of the study: it gives no methods, sample details, decomposition formulas, or evidence about interactions among multiple funds, and directs readers to the paper and its references for further work.

Key ideas

• Hedge fund tail risk may arise from both portfolio holdings and dynamic trading strategies.
• The cited research examines whether tail risk explains variation in equity-oriented fund performance.
• Holdings in stocks exposed to market crashes can contribute to fund tail risk.
• The document provides a research lead, but does not describe a formal decomposition or cross-fund interaction analysis.

Tags

# Looking for a paper related to tail risk of hedge funds and its decomposition


# Looking for a paper related to tail risk of hedge funds and its decomposition












I am looking for a paper related to hedge fund tail risks (think skewness and kurtosis), decomposition of the tail risks into several components and their interactions with each other, other funds, and market. When you own a fund of hedge funds, you are interested in tail risks of the hedge funds and their interactions with each other. Does anyone know of paper with this topic?

Thank you.

## Answer by skoestlmeier (score 1, accepted)

https://quant.stackexchange.com/a/43349

I recommend you to read a quite current paper in the Journal of Financial Economics which mainly covers the analysis of tail risks (and references to papers which focus on its decomposition):

Agarwal/Ruenzi/Weigert (2017): Tail risk in hedge funds: A unique view from portfolio holdings

They mainly analyze

> [...] if tail risk explains the cross-sectional and time-series variation in equity-oriented hedge fund performance and if tail risk in hedge funds arises from their dynamic trading strategies and/or their investments in stocks that are sensitive to equity market crashes.

In summary, they conclude:

> Our results therefore suggest that both, funds’ investments in stocks with high tail risk as well as their dynamic trading strategies, contribute to the tail risk.

The clearly and precise written paper also offers you an extensive reference for further papers you are looking for.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.