PT  - JOURNAL ARTICLE
AU  - Marcos M. López de Prado
AU  - Achim Peijan
TI  - Measuring Loss Potential of Hedge Fund Strategies
AID  - 10.3905/jai.2004.419601
DP  - 2004 Jun 30
TA  - The Journal of Alternative Investments
PG  - 7--31
VI  - 7
IP  - 1
4099  - https://pm-research.com/content/7/1/7.short
4100  - https://pm-research.com/content/7/1/7.full
AB  - In this article the loss potential of hedge funds is measured by combining three market risk measures: VaR, drawdown, and time under the water. Calculations are carried out under three frameworks: normality and time-independence, non-normality and time-independence, and non-normality and time-dependence. The results clearly show that models that assume normality, or even models that account for non-normality but neglect time-dependence, may substantially underestimate hedge fund risk. They also show that VaR is an incomplete measure of market risk whenever the normality assumption does not hold. Under such a scenario, VaR results must be complemented with drawdown and time under the water measures in order to accurately assess the loss potential of hedge funds.