RT Journal Article
SR Electronic
T1 Measuring Loss Potential of Hedge Fund Strategies
JF The Journal of Alternative Investments
FD Institutional Investor Journals
SP 7
OP 31
DO 10.3905/jai.2004.419601
VO 7
IS 1
A1 Marcos M. López de Prado
A1 Achim Peijan
YR 2004
UL https://pm-research.com/content/7/1/7.abstract
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.