Risk Management of Hedge Funds
Thursday 10th March 2005
|10:30 to 11:30||
R Uppal (London Business School)
What to do about excessive volatility
Our objective in this paper is to determine and analyze the trading strategy that would allow an investor such as a hedge fund to take advantage of the excessive stock price volatility that has been documented in the empirical literature on asset pricing. To achieve our objective, we first construct a general equilibrium model where stock prices are excessively volatile. We do this using the same device as in Scheinkman and Xiong (2003) where there are two classes of agents and one class is overconfident about the value of the signal. We then analyze the trading strategy of the rational investors who is not overconfident about the the signal. We find that the portfolio of rational investors consists of three components: a static (i.e., Markowitz) component based only on current expected stock returns and risk, a component that hedges the investor against future revisions in the market's expected dividend growth, and a component that hedges against future disagreement in revisions of expected dividend growth. That is, while rational risk-arbitrageurs find it beneficial to trade on their belief that the market is being foolish, when doing so they must hedge future fluctuations in the market's foolishness. Thus, our analysis illustrates that risk arbitrage cannot be based on just a current price divergence; the risk arbitrage must include also a protection in case there is a deviation from that prediction. We also find that the presence of a few rational traders is not sufficient to eliminate the effect of overconfident investors on excess volatility. Moreover, overconfident investors may survive for a long time before being driven out of the market by rational investors.
|11:30 to 12:00||Coffee|
|12:00 to 13:00||
A Ledford (Management Investments)
Risk modelling and monitoring within a systematic CTA
In this talk I will give an overview of the key features of a systematic trading model that aims to capitalize on a particular type of pricing inefficiency in order to generate returns whilst at the same time controlling for risk.
|13:00 to 14:00||Lunch|
|14:00 to 15:00||
C Beckers ([Barclays Global Investors])
A multi-factor approach to hedge fund risk modelling
Multi-factor risk modelling is well established within the equity world. With its theoretical foundations in Arbitrage Pricing Theory, the practical implementation has either relied upon investment practice (fundamental factor models) or statistical data analysis (factor analysis). Academic research so far has amply proven that systematic risk factors are also present in hedge funds. However the identification of these factors has been hampered by - lack of reliable and high frequency return data - a lack of transparency of the underlying investment strategy - the widespread presence of derivative based (sub)-strategies that are harder to capture In our talk we will briefly review which 'factors' have so far been identified within the various hedge fund strategies. We will review their (in and out of sample) explanatory power and draw inferences for hedge fund portfolio construction.
|15:00 to 16:00||
W Fung (London Business School)
Pricing extreme market event risk: theory and evidence from traded options and trend-following hedge funds
|16:00 to 16:30||Tea|
|16:30 to 17:30||
S Hodges ([Warwick Business School])
An economist's view of risk management of hedge funds
|18:00 to 18:30||Wine and beer reception|