Tail risk in hedgefunds: A unique view from portfolio holdings
Vikas Agarwal (Georgia State University), Stefan Ruenzi (University of Mannheim), Florian Weigert (Swiss Institute of Banking and Finance)
We develop a new systematic tail risk measure for equity-oriented hedge funds to examine the impact of tail risk on fund performance and to identify the sources of tail risk. We find that tail risk affects the cross-sectional variation in fund returns and that investments in both tail-sensitive stocks and options drive tail risk. Moreover, leverage and exposure to funding liquidity shocks are important determinants of tail risk. We find evidence of some funds being able to timetail risk exposure prior to the 2008–2009 financial crisis.
Keywords: Hedge funds, Tail risk, Portfolio holdings, Funding liquidity risk, Leverage