In a working paper entitled "Quantification of Hedge Fund Default Risk", which led to the publication of a full article in the Fall issue of the Journal of Alternative Investments, Jean-René Giraud and Stéphane Daul of the EDHEC Risk and Asset Management Research Centre, together with co-author Corentin Christory, examined numerous cases of hedge fund default in order to find the common factors behind fund failures.

The objective of the paper was to provide an initial framework for quantifying the non-financial extreme risk of hedge funds with the aim of ...

[ Read more : 2 pages - Pdf - 44 Ko ]

After collecting all available information on 109 hedge fund defaults between 1994 and 2005, we investigated two statistical methods in order to shed some light on the risk profile of hedge funds. In an initial stage, we explore the mechanisms behind a hedge fund failure in detail and propose a
causal model that could explain the various scenarios that can occur when hedge funds default. A second stochastic analysis of the sample database allows us to propose a loss model for operational failures and to better understand the limitations of a naïve diversification aimed at reducing the loss from a single event by reducing its share of the overall portfolio.