The Risk Measurement Of Hedge Fund Based On CDaR Method

Hedge fund originated in the United States. At the beginning, it was just a private investment fund taking advantage of hedging tool. But now, it has become an investment fund of high risks, it uses complex strategy to pursue high yields. Because China's capital market started very late, there is no "rear" hedge fund in China before the appearance of stock index futures in 2010. Since the first hedge fund "jun xiang Hang hua" appeared in 2011, hedge funds began to develop rapidly in China. In 2015, China's stock meets a big challenge-it transferred from the bull market to the bear market. However, the hedge fund in China financial market seemed perform stably. Does hedge fund really hedge risks? It needs further research. With the development of China's economy, investors who have accumulated a lot of wealth have been the major demanders of hedge funds. It's good for investors to deepen the understanding of hedge funds if we study various investment strategies of hedge funds. In this article, the author use conditional-drawdown-at-risk (CDaR) to measure the risk of domestic hedge funds and to analysis whether hedge funds have the ability to hedge risk and help investors make a profit when the market is down.This paper firstly explains the definition of hedge funds. Hedge fund is a fund using of stock index futures, options, and derivatives to hedge risks and to earn profits. The hedge fund is different from mutual funds in investment strategy, fees structure and fund-raising way. This article focus on measuring the risk of hedge funds. So the author introduces the characteristics of the coherent risk measurement tools and describe risk measurement tools including standard deviation, semi-variance, sharpe ratio, value-at-risk (VaR), conditional-value-at-risk (CVaR) and maximum drawdown (MDD). On the basis of MDD, the author put forward conditional-drawdown-at-risk (CDaR) to measure risk. CDaR is defined the mean about drawdown which is more than the threshold drawdown with a given confidence level. Then the author describes the characteristics of CDaR. Define the expected return as the return of a portfolio and the CDaR value as the risk of a portfolio, we get mean-CDaR model to construct the optimal portfolio and then we get the necessary optimality conditions of a portfolio problem. And the necessary optimality conditions can be transferred to another form--CDaR beta. Furthermore, we get CDaR alpha with the given CDaR beta. They are similar to beta and alpha in capital asset pricing model. If CDaR beta is negative, the risky asset can hedge risk when the financial market is down. Else, it can not hedge risk. CDaR alpha is a index to measure excess earnings of risky asset.The author selected four types of hedge funds in database of Wind, they are hedge funds of equity with long-short strategy, macro strategy, event-driven and relative value. According different risk measurement index, CDaR beta and CDaR alpha of hedge funds. We can draw the conclusion:First, different risk measurement tools of hedge fund are not consistent. The sharpe ratio is a comprehensive consideration of risks and benefits. The standard deviation, VaR and CVaR only measure risk. VaR measures the losses of risky assets when they meet the volatility of the market, CVaR is the mean of tail losses, it measures the assets'worst losses. Compared to CVaR, CDaR measure the cumulative losses during the whole time, it reflects the duration and severity of the losses. CDaR measures losses in a conservative way, it is consistent with risk-averse investors'preference.Second, CDaR is risk measurement tool, it's positively related to the degree of confidence level. When the confidence level is zero, CDaR which equals to average drawdown measures the common risk. When the confidence level is one, CDaR which equals to maximum drawdown measures the extreme risk.Third, hedge funds with different risks perform consistently under different confidence level. That is, if a hedge fund has higher CDaR than others'at confidence level which equals tol, CDaR of the hedge fund is higher than others' at any confidence level.Fourth, CDaR beta measure systemic risk of a hedge fund when the financial market is down. If CDaR beta is negative, the hedge fund can hedge risk when the financial market is down. Else, it also suffers a loss. And most hedge funds of macro strategy and relative value strategy have negative CDaR beta, they have the capacity of hedging risk.Fifth, CDaR alpha is based on the value of CDaR beta, the hedge fund with higher CDaR alpha also has a higher average return and CAPM alpha. And hedge funds with macro strategy have good yields with higher CDaR alpha among 20 hedge funds.Sixth, the optimal portfolio with higher return based on average-CDaR model has the characteristic of higher risk. And the portfolio efficient frintier is a curve from left to right and bottom to top with descrasing slope. With the increase of confidence level, the risk of portfolio becomes higher!...