TY - JOUR T1 - Measuring Loss Potential of Hedge Fund Strategies JF - The Journal of Alternative Investments SP - 7 LP - 31 DO - 10.3905/jai.2004.419601 VL - 7 IS - 1 AU - Marcos M. López de Prado AU - Achim Peijan Y1 - 2004/06/30 UR - https://pm-research.com/content/7/1/7.abstract N2 - 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. ER -