Calculating hedge fund risk: the draw down and the maximum draw down

Alessio Sancetta and Steve Satchell

Applied Mathematical Finance, 2004, vol. 11, issue 3, 259-282

Abstract: Hedge funds, defined in this context as geared financial entities, frequently use some measure of point loss as a risk measure. This paper considers the statistical properties of an uninterrupted fall in a security price; called a draw down. The distribution of the draw downs in an N-trading period is derived together with an approximation to the distribution of the maximum. Complementary results are provided which are useful for risk calculations. A brief empirical study of the S&P futures is included in order to highlight some of the limitations in the presence of extreme events.

Keywords: Characteristic function; Downside risk; KST distribution (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1080/1350486042000220553

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