Michael Markov, CEO of MPI and a co-author of the paper, says, "Institutional investors and funds of hedge funds now have both an early warning system and a way to control risks intra-month, which is especially useful in light of increasing lock-ups, gates and other redemption restrictions of their investments."
In the paper, Co-Authors Daniel Li, Quantitative Analyst, MPI; Michael Markov, CEO of MPI; and Russ Wermers, Associate Professor of Finance at University of Maryland's Smith School of Business introduce a new method for investors to estimate daily returns in advance of the monthly reporting they usually receive. The approach constructs a synthetic portfolio of factors to mimic the monthly returns of a given hedge fund and then utilizes the associated daily index returns of those factors to project daily hedge fund performance. At the core of this approach is accurate and predictive dynamic modeling of monthly hedge returns. This enables investors to monitor hypothetical performance movements of hedge funds on a daily basis, a tactic that is especially valuable in periods of market turmoil. Additionally, if one has strong views on future market performance or volatility, the proposed technique provides tools to take better advantage of such predictions.
Prof. Wermers, a co-author of the paper, says, "With limited hedge fund disclosure and the continued market volatility, investors are demanding greater clarity around the investments they hold. Rather than wait a full month for a hedge fund manager to report the prior month's returns, investors can utilize this methodology to obtain the frequent insight they need to monitor and hedge risks in their portfolios on a daily basis."
Michael Markov, CEO of MPI, a co-author of the paper, says, "There has been well-founded skepticism in the investment community regarding risk measures, such as Value-at-Risk (VaR), derived from monthly returns.
However, the daily VaR provided by our approach better captures both the dynamics and tail effects of hedge fund risks, giving investors the tools to make timely decisions."