Current Issues in Economics and Finance

Measuring Risk in the Hedge Fund Sector

March/April 2007Volume 13, Number 3
JEL classification: G0, G1, G2, G3

Author: Tobias Adrian

Recent high correlations among hedge fund returns could suggest concentrations of risk comparable to those preceding the hedge fund crisis of 1998. A comparison of the current rise in correlations with the elevation before the 1998 event, however, reveals a key difference. The current increase stems mainly from a decline in the volatility of returns, while the earlier rise was driven by high covariances—an alternative measure of comovement in dollar terms. Because volatility and covariances are lower today, the current hedge fund environment differs from the 1998 environment.

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