Market Risk Management for Hedge Funds -- Contents -- Acknowledgements -- 1 Introduction -- PART I FUNDAMENTALS FOR STYLE AND IMPLICIT VALUE-AT-RISK -- 2 Ongoing Institutionalization -- 2.1 Hedge Fund Industry Size and Asset Flows -- 2.2 Style Distribution -- 2.3 2006-2007 Structural Developments -- 2.3.1 Geography, Listing, Independent Arbitrators and Back Office -- 2.3.2 Pricing and Side Pockets -- 2.4 Are Hedge Funds Becoming Decent? -- 2.4.1 Improved Market Efficiency -- 2.4.2 Transfer of Risk -- 2.4.3 Liquidity Suppliers -- 2.4.4 Captive Capital? -- 2.4.5 The Black Sheep of Capitalism? -- 2.5 Funds of Hedge Funds Persistence -- 2.5.1 Conditional Persistence -- 2.5.2 Interquartile Spreads -- 3 Heterogeneity of Hedge Funds -- 3.1 Testing Sample -- 3.2 Smoothing Effect of a Restrictive Classification -- 3.3 Heterogeneity Revealed through Modern Cluster Analysis -- 3.3.1 Modern Cluster Analysis Measures of a Classification -- 3.3.2 Empirical Comparison -- 3.3.3 Consequence For Value-at-Risk -- 3.4 Appendix A: Indices Sample -- 4 Active and Passive Hedge Fund Indices -- 4.1 Illusions Fostered by Active Hedge Fund Indices -- 4.1.1 The Illusion of Achieving Purity -- 4.1.2 The Illusion of Representativeness -- 4.1.3 The Illusion of Optimality -- 4.2 Passive Indices and the Illusion of being Clones -- 4.2.1 Mechanical Replication -- 4.2.2 Exposure Replication -- 4.2.3 Replication of Distributions -- 4.3 Conclusion -- 5 The Four Dimensions of Risk Management for Hedge Funds -- 5.1 Operational and Structural risk -- 5.1.1 Sources of Structural Risk -- 5.2 Risk Control -- 5.3 Delegation Risk -- 5.3.1 Market Risk -- 5.3.2 Risk Controls -- 5.4 Direct Investment Risk -- 5.4.1 Underlying Approach -- 5.4.2 Strategy Risk Approach -- 5.4.3 Overlapping Approaches -- 5.5 Conclusion -- 5.6 Appendix B: Risks Embedded with Some Classical Alternative Strategies.

5.6.1 Pure Short Selling -- 5.6.2 Long/Short Equity -- 5.6.3 Convertible Arbitrage -- 5.6.4 Fixed Income Arbitrage -- 5.6.5 Risk Arbitrage -- 5.7 Appendix C: Other Common Hedge Funds Risks -- 5.7.1 Leverage Risk -- 5.7.2 Liquidity Risk -- 5.7.3 Counter-Party Risk -- 5.7.4 Specific Event Risk -- PART II STYLE VALUE-AT-RISK -- 6 The Original Style VaR Revisited -- 6.1 The Multi-Index Model -- 6.1.1 The Sharpe (1988) Model -- 6.1.2 Application to Hedge Funds -- 6.1.3 Hedge Funds Indices as Risk Factors -- 6.2 The Style Value-at-Risk -- 6.2.1 The Value-at-Risk Model -- 6.2.2 Original Backtesting -- 6.3 Backtesting Revisited -- 6.3.1 Fundamentals of an Updated Backtesting -- 6.3.2 Updated Exception Rate -- 6.3.3 Sources of Risk Underestimation -- 7 The New Style Model -- 7.1 Extreme Value Theory -- 7.1.1 The Generalized Pareto Distribution -- 7.1.2 Parameter Estimation -- 7.1.3 Method Selection -- 7.1.4 Extreme Quantiles to Value the Risk -- 7.1.5 Assessing the Risk of Hedge Funds -- 7.1.6 Dealing with Autocorrelation -- 7.2 Risk Consolidation -- 7.2.1 Hybrid EVT Approach -- 7.2.2 Tail Dependence -- 7.2.3 Location Parameters -- 7.2.4 Extreme Value-at-Idiosyncratic-Risk -- 7.3 The New Style Model -- 7.3.1 The Model -- 7.3.2 Backtesting -- 7.4 Appendix D: Algorithms for the Elemental Percentile Method -- 7.5 Appendix E: Copulas -- 8 Annualization Problem -- 8.1 Annualization of the Main Statistical Indicators Assuming i.i.d. -- 8.1.1 Annualization of the Mean -- 8.1.2 Annualization of Volatility -- 8.1.3 Annualization of Skewness -- 8.1.4 Annualization of the Kurtosis Coefficient -- 8.1.5 Annualization of Coefficients above the Fourth Order of Magnitude -- 8.1.6 Application to Finance -- 8.2 Annualization of Value-at-Risk Assuming i.i.d. -- 8.2.1 Annualization of Normal Value-at-Risk -- 8.2.2 Annualization of Value-at-Risk for Leptokurtic Distributions.

8.2.3 Annualization of Cornish-Fisher Value-at-Risk -- 8.2.4 Annualization of Value-at-Risk Based on Historical Percentiles -- 8.3 Annualization Without Assuming i.i.d. -- 8.3.1 Annualization of Extreme Value Theory Value-at-Risk -- 8.3.2 Annualization of GARCH Value-at-Risk -- 8.4 Applications to the Style Value-at-Risk -- 8.5 Appendix F: Annualization of Excess Kurtosis -- 8.6 Appendix G: Drost and Nijman Theorem -- PART III IMPLICIT VALUE-AT-RISK -- 9 The Best Choice Implicit Value-at-Risk -- 9.1 Alternative Style Analysis and BCI Model -- 9.2 Theoretical Framework of BCIM -- 9.2.1 Implicit Factors -- 9.2.2 Coefficient of Determination and Independent Variables -- 9.2.3 Automatic Selection of the Best Choice Implicit Model -- 9.3 Best Choice Implicit VaR -- 9.4 Empirical Tests -- 9.4.1 Quality of the BCI Model -- 9.4.2 Backtesting -- 9.4.3 Steadiness -- 10 BCI Model and Hedge Fund Clones -- 10.1 The Ten-Factor Model -- 10.2 The Non-Linear Model -- 11 Risk Budgeting -- 11.1 Value-at-Risk of a Multi-Managers Portfolio -- 11.1.1 Style Model -- 11.1.2 Best Choice Implicit Model -- 11.2 Risk Decomposition: 'Before and After' Attribution -- 11.3 Risk Decomposition: Closed form Attribution -- 11.3.1 New Style Attribution -- 11.3.2 BCIM Attribution -- 12 Value-at-Risk Monitoring -- 12.1 Analysing Graveyards and Hedge Funds Demise -- 12.2 The Probit Model -- 12.3 Empirical Evidence -- 12.3.1 Return and Volatility -- 12.3.2 Value-at-Risk -- 12.4 Implications for Portfolio Management -- 13 Beyond Value-at-Risk -- 13.1 2007-2008 Liquidity Crisis and Hedge Funds -- 13.2 Mechanical Stress Test -- 13.3 Liquidity-Adjusted Value-at-Risk -- 13.3.1 Non-Myopic Risk Measures -- 13.3.2 Liquidity Adjustment Based on Replication -- 13.4 Limit of Liquidity-Adjusted Value-at-Risk and Liquidity Scenario -- Bibliography -- Index.