Portfolio Risk Valuation Print E-mail

Portfolio valuation

Inheriting all the valuation problems of individual funds, portfolios of hedge funds or fund of funds (FoF) exhibit additional complications, which also affect the process of constructing hedge FoF.

First, hedge FoF tend to exhibit higher negative skewness and kurtosis than individual hedge funds. Therefore, inappropriateness of the traditional mean-variance theory that assumes a normal distribution, implies to FoF to even higher extent. Moreover, an increased negative skewness is interpreted as a higher probability of a large loss offsetting by a large probability of a small gain.

Second, a negative impact of diversification of hedge funds is a higher portfolio correlation with the stock market than that of individual funds. Third, the problem of cross correlations across constituent funds and indices require a deep analysis of the factor and multiple regression models.

The specific issues of hedge FoF valuation could be outlined as follows:

  • A greater degree of non-normality than individual funds
  • High correlation with indices
  • Inter correlation of underlying funds

Addressing the above problems the Quant Group offers the most sophisticated range of risk valuation services specially designed for hedge FoF:

  • All the risk metrics as for a single fund
  • Underlying funds' regression analysis
  • Stochastic simulation
  • Sensitivity analysis
  • Principal Component analysis
  • Stress testing
  • What-if analysis
  • Distribution adjustment analysis
  • Structured product analysis (on-demand)
  • Inter-correlation analysis