Skip to main content

Please enter a keyword and click the arrow to search the site

Risks and portfolio decisions involving hedge funds



Authors / Editors

Agarwal C;Naik N Y


Publication Year



Hedge funds are known to exhibit non-linear option-like exposures to standard asset classes and therefore the traditional linear factor model provides limited help in capturing their risk-return tradeoffs. We address this problem by augmenting the traditional model with option-based risk factors. Our results show that a large number of equity-oriented hedge fund strategies exhibit payoffs resembling a short position in a put option on the market index, and therefore bear significant left-tail risk, risk that is ignored by the commonly used mean-variance framework. Using a mean-conditional Value-at-Risk framework, we demonstrate the extent to which the mean-variance framework underestimates the tail risk. Working with the underlying systematic risk factors, we compare the long-run performance with the recent performance of hedge funds and find that their recent performance appears significantly better than their long-run performance. Our analysis provides important insights that can be helpful in addressing issues like construction of fund of funds, risk management, benchmark design and manager compensation involving hedge funds.

Publication Research Centre

Hedge Fund Centre

Series Number



Centre for Hedge Fund Research and Education Working Paper

Available on ECCH


Select up to 4 programmes to compare

Select one more to compare
subscribe_image_desktop 5949B9BFE33243D782D1C7A17E3345D0

Sign up to receive our latest news and business thinking direct to your inbox


Sign up to receive our latest course information and business thinking

Leave your details above if you would like to receive emails containing the latest thought leadership, invitations to events and news about courses that could enhance your career. If you would prefer not to receive our emails, you can still access the case study by clicking the button below. You can opt-out of receiving our emails at any time by visiting: or by unsubscribing through the link provided in our emails. View our Privacy Policy for more information on your rights.