Posts Tagged ‘hedge

11
Oct
11

Finanzas 101: Proxy Hedging

Tal vez es una serie de post más para finanzas 301, pero los ultimos 3 post de Quantivity hacen un buen capitulo de Hedging.

Proxy / Cross Hedging

“The root challenge of two current equity risk and alpha projects boil down to hedging using non-underlying instruments, known as proxy hedging or cross hedging.”

Empirical Quantiles and Proxy Selection

“(…)how to choose an appropriate hedge instrument, especially amongst several alternatives.”

Empirical Copulas and Hedge Basis Risk

“Of particular interest is understanding the dynamics of basis risk under extreme scenarios (both up and down), which are driven by time-varying stochastic joint covariation.”

28
Mar
11

Paper: Hedging dinamico, análisis empírico

An Empirical Analysis of Dynamic Multiscale Hedging using Wavelet Decomposition

Abstract

This paper investigates the hedging effectiveness of a dynamic moving window OLS hedging model, formed using wavelet decomposed time-series. The wavelet transform is applied to calculate the appropriate dynamic minimum-variance hedge ratio for various hedging horizons for a number of assets. The effectiveness of the dynamic multiscale hedging strategy is then tested, both in- and out-of-sample, using standard variance reduction and expanded to include a downside risk metric, the time horizon dependent Value-at-Risk. Measured using variance reduction, the effectiveness converges to one at longer scales, while a measure of VaR reduction indicates a portion of residual risk remains at all scales. Analysis of the hedge portfolio distributions indicate that this unhedged tail risk is related to excess portfolio kurtosis found at all scales.

Link al Paper

26
Oct
10

Paper: Estrategias de cobertura y procesos Lévy

Hedging Strategies and Minimal Variance Portfolios for European and Exotic Options in a Levy Market

Abstract

This paper presents hedging strategies for European and exotic options in a Lévy market. By applying Taylor’s theorem, dynamic hedging portfolios are constructed under different market assumptions, such as the existence of power jump assets or moment swaps. In the case of European options or baskets of European options, static hedging is implemented. It is shown that perfect hedging can be achieved. Delta and gamma hedging strategies are extended to higher moment hedging by investing in other traded derivatives depending on the same underlying asset. This development is of practical importance as such other derivatives might be readily available. Moment swaps or power jump assets are not typically liquidly traded. It is shown how minimal variance portfolios can be used to hedge the higher order terms in a Taylor expansion of the pricing function, investing only in a risk-free bank account, the underlying asset, and potentially variance swaps. The numerical algorithms and performance of the hedging strategies are presented, showing the practical utility of the derived results.

Link al Paper

13
Oct
10

una buena pregunta sobre hedging

Condor Options –siguiendo con la serie de estrategias de hedging (orientada a un VIX Porfolio Hedging, principalmente Futuros de VIX y de Mini VIX)- plantea en su reciente post una excelente pregunta:

When evaluating any hedging strategy, therefore, it is essential to ask: how would the strategy perform in a crisis-free world?

En otras palabras, cuanto te cuesta la estrategia en los periodos donde -a pesar de que Roubini te dice que todo es Crash– todavia no paso nada.

30
Sep
10

critica al hedging convencional

Condor Options tiene un post donde explica los problemas del hedging clasico, tomando como ejemplos a la diversificación y al seguro de portfolio (put y collars).

Portfolio insurance strategies were developed in the late 1970s and early 1980s to provide institutional investors with a guaranteed return and reduced uncertainty, and coincided with the creation of options exchanges. See Bouyé 2009 for an overview of the history and types of portfolio insurance. I’ve tested three such strategies here:

  1. Long ATM 1-year puts: Given a starting $500,000 portfolio allocated to the SPDR S&P 500 ETF (SPY), buy at-the-money (ATM) put options expiring in one year and hold through expiration. Rebalance the SPY shares after expiration to account for any realized gains or losses, and re-hedge.
  2. Long 10% OTM puts: Given a starting $500,000 portfolio allocated to the SPDR S&P 500 ETF (SPY), buy 3-month put options with a strike price 10% below the current SPY price and hold through expiration. Rebalance the SPY shares after expiration to account for any realized gains or losses, and re-hedge.
  3. Zero-cost collars: Given a starting $500,000 portfolio allocated to the SPDR S&P 500 ETF (SPY), buy 3-month zero-cost collars with a long put strike price 10% below the current SPY price and a short call strike price set at the highest level that brings in sufficient credit to offset the price of the put. Hold through expiration. Rebalance the SPY shares after expiration to account for any realized gains or losses, and re-hedge.

15
Aug
10

Paper: Hedge Fund Leverage

Hedge Fund Leverage

Abstract:
We investigate the leverage of hedge funds using both time-series and cross-sectional analysis. Hedge fund leverage is counter-cyclical to the leverage of listed financial intermediaries and decreases prior to the start of the financial crisis in mid-2007. Hedge fund leverage is lowest in early 2009 when the leverage of investment banks is highest. Changes in hedge fund leverage tend to be more predictable by economy-wide factors than by fund-specific characteristics. In particular, decreases in funding costs and increases in market values forecast increases in hedge fund leverage. Decreases in fund return volatilities also increase leverage.

Link al Paper

21
Apr
10

Paper: Hedge Funds entre Alphas y costos

The ABCs of Hedge Funds: Alphas, Betas, & Costs

Abstract:
Despite the retrenchment of the hedge fund industry in 2008, hedge fund assets under management are currently over one and a half trillion dollars. We analyze the potential biases in reported hedge fund returns, in particular survivor-ship bias and back fill bias. We then decompose the returns into three components: the systematic market exposure (beta), the value added by hedge funds (alpha), and the hedge fund fees (costs). We analyze the performance of a universe of about 8,400 hedge funds from the TASS database from January 1995 through December 2009. Our results indicate that both survivor-ship and back fill biases are potentially serious problems. Adjusting for these biases brings the net return from 14.26% to 7.63% for the equally weighted sample. Over the entire period, this return is slightly lower than the S&P 500 return of 8.04%, but includes a statistically significant positive alpha. We estimate a pre-fee return of 11.42%, which we split into a fee (3.78%), an alpha (3.01%), and a beta return (4.62%). The positive alpha is quite remarkable, since the mutual fund industry in aggregate does not produce alpha net of fees. The year by year results also show that alphas from hedge funds were positive during every year of the last decade, even through the recent financial crisis of 2008 and 2009.

Link al Paper




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