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Bailey McCann, Opalesque New York:

A new report out from eVestment looks at the potential tail risk to investors of the 30 largest hedge funds. The portfolio of the 30 largest hedge funds reported $446 billion in assets to eVestment at the end of July 2014, representing 15% of the hedge fund industry's $3.068 trillion in AUM.

The portfolio of the largest funds is expected to outperform the industry. Given the portfolio's weightings and market exposure at the end of july, it is expected to product a return of 0.81% the following month, according to the report. If the portfolio experiences a loss however, there is a 95% chance that it will not return less than -1.01% based on its Value at Risk (VaR). In the event that it does, the return should be limited to -1.60% according to its Expected Tail Loss (ETL) at a 95% confidence level. The volatility expectation for the portfolio over the next month is 1.04%.

An investor purchasing a basket of the 30 largest hedge funds is accepting a bullish position on Asset-Backed Securities, global capital structure and US equity markets, while accepting bearish positions on fixed-rate agency Mortgage-backed securities, AAA-rated US Commercial MBS (CMBS) and are positioned to benefit from a flattening yield curve.

This exposure to ABS is not without its own risks however. Data shows that, the latest historical stress test results reveal the portfolio continues to be most vulnerable to a repeat of the 2008 Sept – Oct C......................

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