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Alternative Market Briefing

New study reveals where hedge funds are most over exposed

Tuesday, November 19, 2013

Beverly Chandler, Opalesque London:

eVestment, an institutional investment data and analytics firm, has issued a report entitled "Hedge Fund Exposure & Tail Risk," which aggregates the positions of the 30 largest hedge funds and quantifies their market exposures, risks, expected returns and performance in stressed market environments. eVestment says that the results show where these funds are overexposed and most vulnerable to large losses through Q3 2013.

The key findings show:

  • The 30 hedge funds controlling over a third of a trillion US dollars are, in aggregate, bullish on medium grade (BBB/BB) US corporate debt, US fixed rate asset backed securities, global high grade (AAA) corporate debt and US equities with a bias towards large cap and growth characteristics.
  • An asset-weighted portfolio comprised of the 30 largest hedge funds is expected to return on average 0.73% over the next month, and in the best case scenario 3.10%, according to its Expected Tail Return (ETR) at a 95% confidence level.
  • Of 11 historical stress test scenarios, a repeat of the 2000 burst of the dot-com tech bubble and the ensuing NASDAQ market crash presents the largest risk of loss for the asset-weighted portfolio of the 30 largest hedge funds. Despite the downward pressure if a similar event were to occur, the portfolio’s negative return expectation is limited to -2.29%.
  • A recurrence of the global market volat......................

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