This paper studies the risk profile and capital adequacy of hedge funds by extending the sample period used in the research of Gupta and Liang (2005). We apply a VaR-based approach to evaluate over 6,000 hedge funds from the Lipper Tass Academic Hedge Fund Database, including live funds and graveyard funds, and find that only a small percentage of them are undercapitalized as of September 2014. By conducting a cross-sectional regression of fund capitalization on various characteristics of hedge funds, we reach a conclusion that whether a hedge fund is adequately capitalized is related to its age and investment style. Standard deviation and leverage ratio often underestimate the market risk hedge funds face, whereas VaR-based measures successfully capture both static and dynamic risk profile of hedge funds.
MSc in Finance Project-Simon Fraser University
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