Style analysis and value-at-risk of Asia-focused hedge funds

Purpose: To identify the risk factors and perform risk analysis for Asia-focused hedge funds. Originality: To our best knowledge, this is the first empirical study applying style analysis to identify risk factors of Asian hedge funds in combination with the use of parametric and nonparametric risk models to examine the Value-at-Risk (VaR) of these funds. Key literature / theoretical perspective: Style analysis and risk analysis models. Design/methodology/approach: First, we make use of the return based style analysis framework to identify the effective style factors for Asia-focused hedge funds. Second, we examine VaR for a hedge fund index using both parametric and non-parametric methods. Findings: We find that Asian hedge funds show significant positive exposures to emerging equity markets, especially emerging markets in Asia, and also hold significant positions in cash and investment grade corporate bonds while they short sell world government and emerging market bonds. Our risk analysis results indicate that the accuracy of VaR models is dominated by their ability to capture the tail distribution of the hedge fund returns. Also, our findings suggest that a parametric approach outperforms the non-parametric historical simulation that is based on past observations only. Research limitations/implications: This paper focuses on hedge fund indices only. Practical and Social implications: This paper proposes a practical approach to identify risk exposures and conduct risk management for Asian hedge funds.