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Khung cơ sở quản trị rủi ro trong hoạt động của các quỹ phòng hộ (Hedge fund)

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Bài viết Khung cơ sở quản trị rủi ro trong hoạt động của các quỹ phòng hộ (Hedge fund) phân tích hai cách tiếp cận trong việc ghi nhận lợi nhuận phi tuyến tính của các quỹ phòng hộ. Phương pháp đầu tiên cung cấp một khuôn khổ phù hợp sử dụng cho việc phân tích các phong cách đầu tư năng động của các quỹ phòng hộ.

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  1. QUẢN TRỊ NGÂN HÀNG & DOANH NGHIỆP Khung cơ sở quản trị rủi ro trong hoạt động của các quỹ phòng hộ (Hedge fund) Nguyễn Diệu Hương Ngày nhận: 13/04/2017 Ngày nhận bản sửa: 17/04/2017 Ngày duyệt đăng: 17/04/2017 Bài viết phân tích hai cách tiếp cận trong việc ghi nhận lợi nhuận phi tuyến tính của các quỹ phòng hộ. Phương pháp đầu tiên cung cấp một khuôn khổ phù hợp sử dụng cho việc phân tích các phong cách đầu tư năng động của các quỹ phòng hộ. Phương pháp còn lại giải thích tính phi tuyến tính trong lợi nhuận của các quỹ phòng hộ bằng các mối quan hệ theo hợp đồng các quỹ phòng hộ với các nhà đầu tư và các nhà môi giới. Ảnh hưởng của các mối quan hệ này được thể hiện thông qua thế giá xuống (short position) của các quỹ phòng hộ đối với hai hợp đồng quyền chọn: quyền chọn tài trợ và quyền chọn mua lại. Bài viết này cũng đề xuất hướng dẫn trong quy trình quản lý rủi ro cho các nhà quản lý quỹ phòng hộ. Họ có thể đạt được mức đòn bẩy tối ưu nhằm thu được lợi nhuận tối đa mà không làm cho mức tiền hạ xuống mức quá thấp. Tác động của phân tích này đối với các nhà đầu tư và các nhà hoạch định chính sách cũng được trình bày. Từ khóa: Quỹ phòng hộ, quản trị rủi ro, quyền chọn tài trợ, quyền chọn mua lại, lợi nhuận phi tuyến tính 1. Introduction Hedge funds have a lot of freedom of choosing asset classes and strategies to generate returns ince the first hedge fund in 1949, there including derivative, short sales and leverage have been a dramatically development (David Stowell, 2010). Those advantages of hedge in hedge funds industry, especially funds make their risk management process become in the past two decades (Hull, 2012). much more complex and different from other While in good states, hedge funds portfolios. While Sharpe’s regression (1992) is a perform very well and gross a lot of money, the useful method to estimate risk exposure of many market position for hedge funds industry fails portfolios, the R2 of this regression over hedge significantly in financial distress. Some researchers fund returns is very low (Fung and Hsieh, 1997). agree that hedge funds’ performance is not This result indicated that there are nonlinearities in persistent over time (Koh et la., 2003). hedge fund returns. © Học viện Ngân hàng Tạp chí Khoa học & Đào tạo Ngân hàng ISSN 1859 - 011X 54 Số 179- Tháng 4. 2017
  2. QUẢN TRỊ NGÂN HÀNG & DOANH NGHIỆP This paper attempts to answer the question what Finally section 5 concludes. is reason for the nonlinearities in hedge funds returns and how to measure their risk exposure. 2. Nonlinearities in hedge fund returns arising The answer for this question is multifaceted. from hedge funds’ portfolio strategies Firstly, the flexibility of hedge funds on choosing different asset classes and dynamic strategies It is apparent that the financial security world is a makes their returns correlated with some “style multi-factor one (Agarwal and Naik, 2004). In this factors”. In another word, hedge fund returns world there are many different types of securities, depend on not only the assets selection but also each is comprised different risk factors involved the strategies used to generate returns from those with their own premium returns. Therefore, which assets. Secondly, because of using dynamic strategy will be chosen depends on which risk strategies, hedge fund returns are also correlated premium associated with its risk factor investors with some “abnormal return factors” such as Fama want to earn. Because hedge fund can flexibly and French’s (1993) value factor and size factor choose among many asset classes and are freedom or Carhart’s (1997) momentum factor. Thirdly, from Investment Company Act (1940) controls it is the fact that in bad states of the world, hedge on leverage, short-selling, cross-holding and fund investors might withdraw their money or derivative position, they are bound to deploy prime brokers might want to raise the requirement more dynamic investment strategies to earn risk margin or get their credit back. Those actions will premium than mutual fund strategies do. reduce the liquidity of hedge funds and make them There are many linear factor models used to have to deleverage to meet those requirements. capture risk exposures of portfolios, for example: Two risk factors above have the same effects the arbitrage pricing theory (APT), the capital to hedge funds that short two valuable options: asset pricing model (CAPM) or Sharpe’s (1992) funding option and redemption option. The reason “style regression”. Those models can attribute for nonlinearities in hedge fund returns is blamed portfolios’ returns to risk factors only if the returns for the presence of those two options. are linear functions of risk factors. Fund and In this paper, we will introduce two risk Hsieh (1997) conduct this Sharpe’s (1992) style management perspectives of hedge funds. Both regression on hedge fund returns. The result is perspectives concentrate on nonlinearities of hedge that: a considerably fraction of chosen hedge funds fund returns. While one perspective focuses on in this regression has significant small R2. 25% of the nonlinearities arising from dynamic portfolio those funds’ returns are even negative correlated strategies followed by hedge funds, the other with standard asset classes returns (Fung and perspective introduces significant nonlinearities Hsieh, 1997). that are captured by two options: funding Therefore, those models for linear relationship option and redemption option. Section 2 starts between returns and risk factors cannot be used by explaining the idea that deploying dynamic for hedge fund returns. Numbers of journals have strategies is the source of nonlinearities in hedge priced securities whose returns are nonlinear fund returns. Then two models that are based on with the risk factors using nonlinear asset pricing simple return model are introduced. A different frameworks, for example: Rubinstein (1973), approach to explain nonlinearities in hedge Kraus and Litzenberger (1976), Dybvig and fund returns will be presented in section 3. The Ingersoll (1982), Bansal and Viswanathan (1993), reason for the nonlinearities is from shorting two Bansal, Hsieh and Viswanathan (1993) and more valuable options of hedge funds. This section also recently Harvey and Siddique (2000a, 2000b). discusses a measure for optimal level of leverage Now in this paper we will estimate the following and unencumbered cash level. Section 4 uses regression: frameworks developed in section 2 and section 3 Rit = αit + Ʃ bikFkt + uit (1) to suggest a guideline for risk management process This model looks like the Sharpe’s “style model” of hedge funds. Some implications for hedge fund or other models for linear relationship where Rt investors and policy makers will also be reviewed. is excess returns on hedge fund index i, αt is the Tạp chí Khoa học & Đào tạo Ngân hàng Số 179- Tháng 4. 2017 55
  3. QUẢN TRỊ NGÂN HÀNG & DOANH NGHIỆP intercept for hedge fund i, bik is avareage loading and Hsieh to take place the second step. kth factor for hedge fund i over regression period, In the second step, Fung and Hsieh factor analyze Fkt is excess return of kth factor over period t, ui is nearly 500 hedge funds to point out five qualitative error term of hedge fund index i. However some style factors that are used to delineate trading risk factors are added to this model to capture strategies by hedge funds industry. They are: the risk exposure of hedge fund returns. Next we Systems/ Trend Follow, Systems/ Opportunistic, will deeply look into two ways to choose the risk Value, Distressed and Global/ Macro. The concern factors to analyze the nonlinearities in hedge fund here is that whether those strategies are dynamic returns below. strategies that make the hedge fund returns nonlinear or they are just location choice. The 2.1. An extension of Sharpe’s style regression regression based on equation (1) will be run over five “style” hedge funds on eight standard asset The first approach we will discuss is an extension classes and high yield bonds found in the first step. of Sharpe’s (1992) “style regression”. According It will give us the information about whether this to Fung and Hsieh (1997), there are two aspects style use dynamic strategy or not by answer the that contribute to the concept of “style”: loca- question how the return of each style factor change tion choice and trading strategies. While location in different states of the world. The result is that: choice is asset selection decision made by hedge three factors: System/ Trend Follow, Systems/ fund managers to produce return, trading strat- Opportunistic, Global/ Macro are dynamic egy term refers to how to manage those assets in strategies because their returns move extremely in funds’ portfolios: direction (long or short) and utmost cases. The returns of hedge fund portfolios quantity (leverage) (Fung and Hsieh, 1997). In the followed those strategies are nonlinear with the regression equation (1), location choice is Fkt and returns of standard asset classes. Fung and Hsieh trading strategies is the bt. Hence returns are the (1997) decide to include those three style factors product of trading strategies and location choice. into original model to build a more complete However hedge fund returns are not that simple model that can capture the nonlinearities of hedge because of not only various asset classes it can fund returns. choose (F is large) but huge range of b: b can be from negative infinity to positive infinity. 2.2. A model based on option-like feature Moreover, b can even change rapidly when hedge funds deploy dynamic trading strategies. In Fung In Agarwal and Naik study, they also run and Hsieh (1997) article, there are two steps to regression on equation (1) like Fung and Hsieh find down a model to capture the nonlinearities of do (1997). Although both studies agree that hedge fund returns. the strategies a hedge fund follows determine For the first step, Fung and Hsieh choose eight whether its return is linear or not. However, there asset classes and high yield corporate bonds for are some differences between two studies. We the buy-and-hold strategy. They are two bond will thoroughly present how the differences in classes (JP Morgan U.S. government bonds and JP Argarwal and Naik’s study make their model more Morgan non-U.S. government bonds), three equity flexible to capture the nonlinearities in returns of classes (IFC emerging market equities, MSCI different strategies of hedge funds as follow. U.S. equities and MSCI non-U.S. equities), one Agarwal and Naik also follow the regression: commodity (gold), 1-month euro deposit for cash Rti = αi + Ʃ bki Fkt + uti (1) and the Federal Reserve’s Trade Weighted Dollar All of these terms in the above function are Index for currency. The result of this regression calculated over regression period. Fkt here is on hedge fund returns show that the hedge fund risk factors which can be either buy-and-hold returns are nonlinear with those asset classes re- or option-based risk factors. Agarwal and Naik turns. The reason is that this model is for buy-and- choose three bonds such as Lehman high yield hold strategy; however hedge fund managers use index, Salomon Brothers world government bond dynamic strategies. That’s the incentive for Fung index and Salomon Brothers government and 56 Số 179- Tháng 4. 2017 Tạp chí Khoa học & Đào tạo Ngân hàng
  4. QUẢN TRỊ NGÂN HÀNG & DOANH NGHIỆP corporate markets index; four equities including make better the Sharpe ratio or they reply to their Morgan Stanley Capital International (MSCI) incentive contract by designing hedge fund returns emerging markets index, MSCI world except USA similar to payoff of writing a put option (Lo, 2001; index, Russell 3000 index and Russell 3000 lagged Siegmann and Lucas, 2002). It is well noted that index; one cash index and one commodities index. the risk exposure of event arbitrage strategy found The improvement of this study is that Agarwal by this model is consistent with Mitchell and and Naik include strategies that can earn abnormal Pulvino’s (2001) result. returns in this regression. They are momentum In short, in this section, we deeply present the factor (winners minus losers) (Carhart, 1997), size nonlinearities in hedge fund returns arising from factor (small minus big) and value factor (high their investment strategies. The models that work minus low) (Fama and French, 1993). They also for mutual fund returns cannot capture the risk use an additional factor to describe the credit risk exposure of hedge funds’ payoff because of the exposure. It is the change in the default spread. flexibility in dynamic strategies hedge funds can Beside risk factors for buy-and-hold strategies, deploy. Moreover, because of this flexibility, it risk factors that capture option-based risk are used is nearly impossible to separate fund managers’ including liquid out-of-the-money (OTM) and at- skills into two groups: market timing and security the-money (ATM) European options on S&P 500 selection. We also clearly discuss two different index. methods used to capture the risk exposure of The second difference between two studies is the hedge funds. Although the second method is more hedge funds’ strategies that researchers choose to flexible and can capture more strategies of hedge critically analyze. Agarwal and Naik focus on two funds, both of them agree on the nonlinearities types of strategies: the one whose return arises of fund returns. However, no method can capture from mispricing securities and the one whose all strategies followed by hedge funds because of return arises from taking directional bets. In the the lack of information and the huge number of first type, fund managers gain premium returns combination strategies of hedge funds. The next from mispricing securities rather than economic section will thoroughly look into another method movements of markets. They analyze six strategies which can capture the nonlinearities in hedge in this category: equity hedge, restructuring, event fund returns arising from “funding option” and driven, event arbitrage, convertible arbitrage and “redemption option” regarding the strategies those relative value arbitrage. The other type including funds follow. short-selling and equity non-hedge are strategies whose returns earned from taking directional bets. 3. Nonlinearities in hedge fund returns aris- After choosing the risk factors and categorizing ing from “funding option” and “redemption the hedge funds strategies, the regression will option” be run to determine which strategies cause the nonlinearities in funds’ payoffs. In general, the There have been many studies that try to capture result shows that the relationship between risks the risk exposure of hedge funds. Two of them and returns are nonlinear in most hedge fund have been critical analyzed in the above section. strategies because the beta of each regression is However the credit crisis in mid 2007 with the significant. Especially, the returns of hedge funds collapses of many hedge funds indicated that in the first category follow restructuring, event there were something missed from our hedge driven, relative value arbitrage, event arbitrage fund risk analysis. Dai and Sundaresan (2009) and convertible arbitrage are same as payoffs point out some lessons learnt from the crisis that arise from buying a put option on market about a different way to look into the risk of indexes. There are two main reasons: firstly, the hedge funds. They show that the contractual movements of these strategies returns primarily relationships between hedge funds and their correlate to movement of market indexes. They go investors, their prime brokers are sources of risk. down when market goes down and vice versa. The In periods of crisis, hedge funds’ prime brokers second reason might be that hedge fund managers and other counterparties tend to either raise the Tạp chí Khoa học & Đào tạo Ngân hàng Số 179- Tháng 4. 2017 57
  5. QUẢN TRỊ NGÂN HÀNG & DOANH NGHIỆP margin requirement or/and take Figure 1. Contractual Relationships out their credit lines. Their moves can make not only the hedge funds’ funding costs escalate but their profitable risk positions rickety. Hedge funds are certain to involuntarily deleverage in bad states of the world, as a result incur losses, and even stand a chance to collapse. Moreover, investors in those periods can withdraw their money too. Those risks are faced by hedge funds that have even been performing effectively according to other performance standards Source: Dai and Sundaresan (2009) before or even during the crisis. Because of the existence of those two risks, there exercised. This option is called “funding option” are nonlinearities in hedge fund returns. “Funding held by prime brokers. option” and “redemption option” are introduced to When hedge funds need money most to protect capture those two risks, where “funding option” its survival is also when investors are likely to is the short option position with hedge fund prime withdraw their money from the funds. If these brokers and “redemption option” is the one with actions of investors occur, hedge funds have to their investors. Then the effects of “funding be ready to pay back to investors. The effects of option” and “redemption option” to hedge funds’ these actions are similar to the effects of shorting returns are discussed too. We also introduce the an option by hedge funds. This option is called concept “unencumbered cash” and its role in “redemption option” held by investors managing hedge funds’ risks. Two options as well If the funding options held by prime brokers and as the level of “unencumbered cash” will together funding counterparties are exercised in financial play important parts in hedge fund return model. distress, hedge funds have to deleverage. If hedge funds do not prepare well for this risk, they may 3.1. “Funding option” and “redemption option” have to involuntary decrease their leverage level that may cost a lot. If hedge funds involuntarily In the first part of this section, the definition and deleverage, the cost of this may be very high. effects of “funding option” and “redemption In those circumstances, hedge funds may find option” to hedge fund returns will be thoroughly difficult to keep their survivals. Prime brokers discussed. Shorting in those two options are often set a limit to NAV (net asset value). If asset thought to be risk factors that hedge fund faces. value falls below this limit, the option will be The Figure 1 below represents the relationships exercised. that hedge funds have with their prime brokers and In the case of redemption options, AUM (asset their investors. under management) is the basis for investors to In financial distress period, prime brokers are decide when they will exercise their options. If bound to increase the requirement margin or too much money is withdrawn from the funds, withdraw their credit lines. If these actions happen, NAV of funds may declines below prime brokers’ hedge funds have to reduce their leverage level. limit. It will cause the funding option to exercise The effects of prime brokers’ actions to hedge fund too and hedge funds face the risk of involuntarily are similar to the effects of shorting an option to deleverage. According to the redemption requests deleverage in bad states of the world. Shorting this of investors, hedge funds industry paid almost option means that hedge funds have a commitment $400 billion of capital in 2008. to decrease their leverage level when the option is It is clear that both options can be exercised in bad 58 Số 179- Tháng 4. 2017 Tạp chí Khoa học & Đào tạo Ngân hàng
  6. QUẢN TRỊ NGÂN HÀNG & DOANH NGHIỆP states of the world. The hedge fund returns or even by the change of number of shares over time. their survivals will be influenced dramatically if When the annual returns fall below the limit those two options are exercised. Therefore the that investors set for hedge funds, investors will fact is that the process of capture hedge fund withdraw a fraction of AUM from the funds. returns as well as their risk is not only looking at Such an action will make the number of shares the strategies they deploy but the hedge funds’ decrease. At the same time, hedge funds also managements of two options. In the next section have contracts with their prime brokers and other the concept of “unencumbered cash” together with counterparties. If annual returns are lower than the two options are the foundation to build a model other limits that prime brokers set for hedge funds, that can capture the return of hedge funds given prime brokers can increase the required margin the existence of funding option and redemption or withdraw their credit lines from the funds. The option. With this model, it is apparent that the limits for prime brokers are often lower than the relationship between hedge fund returns and their ones for investors. It is apparent that if the hedge risk factors is nonlinear. funds can prove that they are safe credit, both investors and prime brokers can lower their limits 3.2. Model of Hedge Fund Return for annual returns. One signal that investors and prime brokers can use to indicate the safety of If leverage level of a hedge fund is zero or this hedge funds is their unencumbered cash level. hedge fund is totally “self-financing”, its return Unencumbered cash is the fraction of AUM that can be written as follow: is not posted to primer brokers as margin. The Rt = αt-1 + σt-1 εt (2) economical definition of unencumbered cash is the Where Rt is the return of hedge fund, αt is excess amount investors can take if all margins posted return without any leverage and σt is the volatility are lost or all counterparties fail to repay the of hedge fund’s assets. In fact, in order to earn margins. Unencumbered cash is an important tool premium return, hedge funds need to increase their to manage the risk that hedge funds bear. It might leverage level. However, the level of leverage is be the most important one for some reasons (Dai finite because an initial margin has to be paid to & Sundaresan, 2009). First of all, it is obvious prime brokers or other counterparties to alleviate that the higher the level of unencumbered cash is, the risk those parties bear in case that hedge the more confident investors feel about the funds. funds cannot pay the debt. Given the existence In this case, unencumbered cash is a form of of funding option and redemption option, if insurance for investors. Secondly, unencumbered the leverage level of hedge funds (denote L) is cash level is a signal for not only investors but low, the relationships between their expected also prime brokers. Unencumbered cash level is returns and L may be linear. When L increases, correlated with the leverage of hedge funds. So it the volatility of hedge funds’ expected returns helps prime brokers measure the level of risk they will be bigger. Then the probabilities that two take to set an appropriate limit for hedge funds. options are exercised increase. Because the two Last but not least, in a financial world with a lot of options are shorted by hedge funds, the case inefficiencies, a risk management tool that focuses when they are in the money will have negative on unencumbered cash level is certainly useful for effects on hedge fund returns. If L is big enough, different parts in managing risk of hedge funds. the negative effects will dominate and make the Dai and Sundaresan (2009) also point out that expected returns not linear with L. It is clear that the unencumbered cash level of a hedge fund is given strategies that hedge funds choose to deploy, negatively correlated with its level of leverage, the level of leverage they take will affect their volatility of its assets and change in the limit expected returns. We will present how two options prime brokers set to hedge fund but positively and “unencumbered cash” affect expected returns, correlated with the change in AUM between two then show the model of expected returns given the periods. That means the unencumbered cash level presence of two options. will decrease if leverage level, volatility of hedge The effects of redemption option are captured fund’s assets and limit posted by prime broker Tạp chí Khoa học & Đào tạo Ngân hàng Số 179- Tháng 4. 2017 59
  7. QUẢN TRỊ NGÂN HÀNG & DOANH NGHIỆP increases and AUM decreases over time. choosing optimal levels for leverage, hedge funds It is well noted that one practical risk management must be careful with the level of unencumbered standard is keeping the level of unencumbered cash. It is noted that the optimal leverage level cash constant over time. Because this level can can be associated with a too low unencumbered change immediately over time if the level of cash level. Therefore hedge funds often set a limit AUM, volatility or limit set by prime brokers level for unencumbered cash and then choose the change, in order to keep unencumbered cash level optimal level of leverage that doesn’t make the constant, hedge fund has to voluntarily change the unencumbered cash level fall below this limit. level of leverage. It is important to note that this With this function above, this approach not only change in leverage level here is voluntary so the shows the nonlinearities in hedge fund returns but cost of this action may be insignificant and the also has advantages compared to other methods. benefit of this action is reduce the probability of It provide a tool to calculate the optimal level of exercising the two options. If one or both options leverage and unencumbered cash that help hedge are exercised in bad states of the world, the cost funds gain the maximum return and safe from to deleverage involuntary will be considerable or financial distress. even can be the death of hedge fund. With the critical analysis of two options and 3.3. Advantages of this approach unencumbered cash level, Dai and Sundaresan (2009) come up with a model for return of hedge The first highlight of the approach analyzed above fund: is the way it solves the risk budgeting problem. ht+1 ≡ ln(NAVt+1(NAVt)-1) = Ltσt[Rt-1σt-1σ − a(1 Other methods often try to find a suitable VaR in − Lt+1Lt-1 1_{Rt-1σt-1 < R(Ltσt)-1} − b(1 − Lt+1Lt-1 order to earn a target expected return. However, 1_{Rt-1σt-1 < R(Ltσt)-1}] (3) this approach makes an effort to get the biggest Obviously, the returns of hedge funds are return keeping in mind that the two options can nonlinear with the level of leverage given the be exercised if the leverage level is too high. In existence of funding and redemption options. The bad states of the world, if one or both options are part in brackets shows the effect of two options to exercised, each risk taking unit will cost hedge the hedge fund returns. The higher the leverage is, funds different value to involuntarily deleverage. the higher value of the part outside the bracket is. This approach also points out an important At the same time, the higher the level of leverage conclusion: with the presence of two options, the is, the higher the probability of two options being optimal leverage level is lower. More significantly exercise, that makes value of the part in the the higher the deleverage cost is, the lower bracket decrease. Therefore, leverage level has the optimal level of leverage is. This approach a dynamic relationship with the return of hedge provides a new way to look into risk aversion and funds. distance to default. It is said that risk aversion is The second conclusion is that not only the level endogenous and determined by the deleverage of leverage but the volatility of hedge fund’s cost if two options are exercised unexpectedly. assets together affect the expected returns. In Whereas distance to default is endogenous too, order to gain the maximum returns, funds should hedge funds can choose the optimal levels of adjust both leverage and volatility levels. More distance to default to keep the funds safe from interestingly, if two funds agree on deploying the unexpected increase in volatility or unexpected same strategies but have two different volatilities changes in limits set by investors and prime in asset, they should choose two different leverage brokers. levels as well to earn their optimal returns. Secondly, this approach also discusses the relative Lastly, Dai and Sundaresan also suggest that when risk capital among risk taking units and the role (3) 60 Số 179- Tháng 4. 2017 Tạp chí Khoa học & Đào tạo Ngân hàng
  8. QUẢN TRỊ NGÂN HÀNG & DOANH NGHIỆP of unencumbered cash level. It is notably that the implosion and vulnerability of extreme events. relative risk capital depends not only on Sharpe In the second place, building good relationships ratio but the correlation coefficient among risk with prime brokers and investors holds no less taking units. This term will be determined solely important role. Hedge funds with good risk by Sharpe ratio if the correlation coefficient management strategies will try to have long-term between two risk taking units is zero. Dai and and strong relationships with multiple prime Sundarean (2009) also said that when choosing the brokers. It is unlikely that all prime brokers want optimal leverage level of hedge funds, managers to exercise funding options at the same time. should consider the level of unencumbered cash. Therefore, having multiple prime brokers also Because if one or both options are exercised and keeps hedge funds safer from exercised options the unencumbered cash level is too low, hedge and gives other counterparties more confidence funds may be found in difficult to meet those new about survival of hedge fund even in financial requirements and have to involuntarily deleverage crisis. Moreover, hedge funds should pay attention or even fail. Therefore, hedge funds should set in building relationships with investors too. In a limit for unencumbered cash level and choose redemption contract, there is often penalty for the optimal leverage levels to gain the maximum early exercising redemption option. Since all returns without make unencumbered cash level fall these conditions are proposed by investors and below the limit. agreed by both sides, all investors understand that In brief, with presence of two options: funding exercising redemption options in bad states of option and redemption option, a new and useful the world helps them take back their money at a method to capture hedge funds’ risk is introduced. price. Understanding well each type of investors This method together with other traditional ones and designing suitable contracts with them is an may help hedge fund managers have a better sight important mission for hedge fund managers. about their risks. We will try to make a proper In the third place, unencumbered cash level needs guideline on risk management for hedge fund carefully considering. When investors want to managers, investors and policy makers in the next redeem their money or prime brokers want to section. increase the initial required margin or volatility of assets changes unexpectedly, hedge funds may 4. Guideline for risk management process of find itself in difficult to provide those liquidities hedge funds due to the shortage of unencumbered cash. In extreme cases, hedge funds may have no other Three important lessons for risk managers of choice than fire sale. In order to keep itself safe, hedge funds are the nonlinearities in hedge fund hedge fund managers should set a threshold for returns, importance of good relationships with unencumbered cash level, and choose an optimal prime brokers and investors; and the role of level of leverage that always keep unencumbered unencumbered cash level in risk management cash level above this limit. process. Moreover, this section also provides Last but not least, benefits of efficient risk advices for investors in making better investment management tools for investors and prime decisions on hedge funds and for policy makers in brokers are noteworthy. The better understanding order to construct a more stable financial market about risk exposure of hedge funds may help given the risk exposure of hedge funds. investors make accurate investment decisions First and foremost, it is apparent that even each about managers’ compensation. This knowledge researcher uses different approaches, all of them also provides policy makers a better perspective agree on the nonlinearities of hedge fund returns. drawing of risk exposure hedge funds can bring This understanding will help hedge fund managers to the whole financial market. Moreover, benefits make better decisions on choosing dynamic strate- from good contractual relationships between gies and measure expected returns and risk more hedge funds and prime brokers, investors have accurately. Hedge fund managers should be extra attracted much interest from three parties. Besides, careful to mitigate the possibility of diversification unencumbered cash level plays an important Tạp chí Khoa học & Đào tạo Ngân hàng Số 179- Tháng 4. 2017 61
  9. QUẢN TRỊ NGÂN HÀNG & DOANH NGHIỆP role in helping policy makers make decisions hedge funds and to evaluate their performance. too. Dai and Sundaresan (2009) said that using It would be interesting to examine whether unencumbered cash level to measure fund’s risk such a risk-adjusted performance is related to is easier and more transparent than using the characteristic features of hedge funds such as traditional tool: VaR. VaR is efficient but demands size, lockup period, incentive fees, etc. as well as more assumptions and often depends on the to investigate the determinants of inter-temporal tool prime brokers use to measure hedge funds’ variation in the alphas of hedge funds. These risk. More notably given many advantages this issues are being investigated as a part of ongoing approach gives to investors, policy makers should research in the future. try their best to make sure all investors have the same benefits. 5. Conclusion Understanding the risk exposure of hedge funds is an important area of research. We need a Hedge funds differ from others in many aspects. better understanding of this issue while making Hedge funds have flexibility in choosing many investment management decisions involving hedge asset classes and dynamics strategies. Those funds. Unfortunately this is a tricky issue, since advantages help them gain extra returns but hedge funds provide limited disclosure. Moreover, also require a more complex risk management hedge funds are not popular in Vietnam. So framework. There are two main explanations the information of hedge funds is limited to be for the nonlinearities of their returns: dynamics tested. There are several papers analyzing risk strategies and short positions of two options with management of hedge funds from investors’ investors and prime brokers perspective. However, our approach in this paper Until now, hedge funds are still not popular in focus more about risk management from hedge Vietnam. One of the most important reasons for funs’ managers’ perspective. In this context, our this is that hedge funds require a sophisticated and approach provides useful information to managers complex risk management. There are also other dealing with risk management related issues. problems in Vietnam that make hedge funds even Estimation of hedge fund risks is also important, more risky. They are: the simplicity of financial as a large number of hedge funds propose a market, the lack of financial instruments, the risk free rate as a bench mark for claiming fees. information asymmetric among investors and Benchmarking of hedge funds is an important hedge funds’ managers and the lack of legal area of research. Investing in hedge fund involves provisions. If the two risk management approaches significant costs for the investor and selecting the in this paper are considered to apply in Vietnam, right manager is crucial in case of hedge funds. there are many things need to be done. However, Hence, a benchmark that accounts for the linear all in all, for all the mentioned above, we strongly and non-linear risk exposures of hedge funds believe that hedge funds managers, investors is necessary for their performance evaluation. and policy makers should take our analysis into Our study contributes by providing a simple yet attention to make effective decisions in the future powerful approach to design a benchmark for to not only generate more profit but also keep a Tài liệu tham khảo 1. Agarwal, V., & Naik, Y.N., 2004. Risks and portfolio decisions involving hedge funds. The Review of Financial Studies, spring, 17(1), 63-98. 2. Bansal, R., Hsieh, D., & Viswanathan, S., 1993. A New Approach to International Arbitrage Pricing. Journal of Finance, 48, 1719-1747. 3. Bansal, R., & Viswanathan, S., 1993. No Arbitrage and Arbitrage Pricing. Journal of Finance, 48, 1231-1262. Carhart, M., 1997. On Persistence in Mutual Fund Performance. Journal of Finance, 52, 57-82. 4. Dai, Q., & Sundaresan, S.M., 2007. Risk Management Framework for Hedge Funds: Role of Funding and Redemption Options on Leverage. Available at SSRN: http://ssrn.com/abstract=1439706 5. Dybvig, P. H., & Ingersoll, J.E., 1982. Mean Varian Theory in Complete Markets. Journal of Business, 55, 233-251. 6. Fama, E. F., & French, K.R., 1993. Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial 62 Số 179- Tháng 4. 2017 Tạp chí Khoa học & Đào tạo Ngân hàng
  10. QUẢN TRỊ NGÂN HÀNG & DOANH NGHIỆP healthy Economics,and33,stable 3-56. financial markets. ■ 7. Fung, W., & Hsieh, D., 1997a. Empirical characteristics of dynamic trading strategies: The case of hedge funds. The Review of Financial Studies, 10, 275-302. 8. Gatev, E. G., Goetzmann, W.N., & Rouwenhorst, K.G., 1999. Pairs Trading: Performance of a Relative Value Arbitrage Rule. Working paper, Yale University. 9. Glosten, L.R., & Jagannathan, R., 1994. A Contingent Claim Approach to Performance Evaluation. Journal of Empirical Finance, 1, 133-160. 10. Gregoriou, G. N., 2002. Hedge Fund Survival Lifetimes. Journal of Asset Management, 3(3), 237-252. Harvey, C., & Siddique, A., 2000a. Conditional Skewness in Asset Pricing Tests. Journal of Finance, 55, 1263-129. 11. Harvey, C., & Siddique, A., 2000b, Time-Varying Conditional Skewness and the Market Risk Premium. Research in Banking and Finance, 1, 27-60. 12. Hull, C.J., 2012. Risk Management and Financial Institutions, Third Edition, John Wiley & Son, Inc. INVESTMENT COM- PANY ACT 1940 13. Jagannathan, R., & Korajczyk, R., 1986. Assessing the Market Timing Performance of Managed Portfolios. Journal of Busi- ness, 59, 217-235. 14. Koh, F., Lee, K.C., & Fai, K., 2004. Investing in Hedge Funds: Risks, Returns and Performance Measurement. Research Col- lection Lee Kong Chian School of Business. Paper 2341. 15. Kraus, A., & Litzenberger, R., 1976. Skewness Preference and the Valuation of Risk Assets. Journal of Finance, 31, 1085- 1100. 16. Lo, A., 2008. Hedge Funds: An Analytic Perspective. Princeton University Press. 17. Merton, R.C., & Henriksson, R.D., 1981. On Market Timing and Investment Performance II: Statistical Procedures for Evalu- ating Forecasting Skills. Journal of Business, 41, 867-887. 18. Mitchell, M., & Pulvino, T., 2001. Characteristics of Risk in Risk Arbitrage. Journal of Finance, 56, 2135-2175. 19. Sharpe, W.F., 1992. Asset Allocation: Management Style and Performance Measurement. Journal of Portfolio Management, 18, 7-19. 20. Siegmann, A., & Lucas, A., 2002. Explaining Hedge Fund Investment Styles by Loss Aversion: A Rational Alternative. Work- ing paper, Vrije Univesiteit, Amsterdam. 21. Stowell, D., 2010. An introduction to Investment Banks, Hedge Funds, and Private Equity,The New Paradigm, Elsevier, US. 22. Treynor, J., & Mazuy, K., 1966. Can Mutual Funds Outguess the Market? Harvard Business Review, 44, 131-136. Thông tin tác giả Nguyễn Diệu Hương, Thạc sỹ Khoa Ngân hàng, Học viện Ngân hàng Email: huongnd@hvnh.edu.vn Summary Framework for risk management of Hedge fund This paper analyzes two different approaches to capture the nonlinearities of hedge fund returns. One approach provides an adequate framework used for style analysis of hedge funds’ dynamic strategies. The other one uses the contractual relationships hedge funds have with their investors and prime brokers to explain the nonlinearities in their returns. The effects of those relationships are captured by hedge funds’ short positions of two options: funding option and redemption option. This paper also suggests a guideline in risk management process for hedge funds’ managers. They can obtain the optimal leverage level to gain maximum returns without making unencumbered cash level too low. Implication of this analysis for investors and policy makers are also presented. Key- words: hedge fund, risk management, funding option, redemption option, nonlinearities returns. Huong Dieu Nguyen, M.Ec. Banking Faculty, Banking Academy Tạp chí Khoa học & Đào tạo Ngân hàng Số 179- Tháng 4. 2017 63
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