How Surprising are Returns in 2008? A Review of Hedge Fund Risks

• Main Author: TEO, Melvyn
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2008
• Subjects: Hedge funds; hedge fund risks; hedge fund returns; hedge fund performance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/bnp_research/9; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1012&context=bnp_research
• Institution: Singapore Management University

Many investors, expecting absolute returns, were shocked by the dismal performance of various hedge fund investment strategies in 2008. In this issue of the statistical digest, I review the academic literature on hedge fund risks and conduct some simple analyses. I find that many hedge funds, even those without directional equity exposure, have payoffs that resemble those from writing put options on equity indices. A central theme is that their strategies all involve being short liquidity. Therefore, these hedge funds tend to underperform during liquidity crises, which coincide with extreme bear markets.