This paper mainly focuses on the correlation between live hedge fund return and their value at risk (VaR), and is based on the historical data from May 2000 to April 2010. The authors adopt portfolio level analyses and fund level cross-sectional regression, and find that there is significant positive correlation, both statistically and economically, between the hedge fund return and VaRs (parametric, non-parametric and GARCH). Further research is conducted by sub-dividing the overall period into pre-Financial-Crisis and Financial Crisis, and demonstrates that this correlation holds in both periods but weakens in the Financial Crisis. Besides, the authors identify the approximately negative correlation between hedge fund portfolio return and increase in VaR, and develop an effective method of selection.
FRM Project-Simon Fraser University
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