A locally-built, LLM-digested index of recent arXiv papers in quant finance, geometry/topology, and statistical ML — keyword search served straight from SQLite on this machine.
This report was originally written as an industry white paper on Hedge Funds. This paper gives an overview to Hedge Funds, with a focus on risk management issues. We define and explain the general characteristics of Hedge Funds, their main investment strategies and the risk models employed. We address the problems in H…
Study uses topic modeling and sentiment analysis to uncover hedge fund performance insights.
The proprietary nature of Hedge Fund investing means that it is common practise for managers to release minimal information about their returns. The construction of a Fund of Hedge Funds portfolio requires a correlation matrix which often has to be estimated using a relatively small sample of monthly returns data which…
Study uses machine learning and PolyModel to improve hedge fund performance.
The study designs a green investment fund and a hedging strategy for insurance policies linked to it.
Blockchain protocol improves traditional mutual funds with performance fees and investor protection.
Hedge Funds are considered as one of the portfolio management sectors which shows a fastest growing for the past decade. An optimal Hedge Fund management requires an appropriate risk metrics. The classic CAPM theory and its Ratio Sharpe fail to capture some crucial aspects due to the strong non-Gaussian character of He…
Improved estimation of hedge fund tail risks using a novel model.
The research presented in this work is motivated by some recent papers regarding hedging and valuation of financial securities subject to funding costs, collateralization and counterparty credit risk. Our goal is to provide a sound theoretical underpinning for some results presented in these papers by developing a unif…
Study on optimal fees in hedge funds with first-loss compensation.
A fund manager invests both the fund's assets and own private wealth in separate but potentially correlated risky assets, aiming to maximize expected utility from private wealth in the long run. If relative risk aversion and investment opportunities are constant, we find that the fund's portfolio depends only on the fu…
The paper studies how to protect hedge funds from losses using reinsurance.
It is well known that traded foreign exchange forwards and cross currency swaps (CCS) cannot be priced applying overnight cash and carry arguments as they imply absence of funding advantage of one currency to the other. This paper proposes a heuristic present value concept for multi-currency pricing and hedging which a…
Shorting IG ETFs can hedge bond portfolios during market drawdowns effectively.
Hedge funds have long been viewed as a veritable "black box" of investing since outsiders may never view the exact composition of portfolio holdings. Therefore, the ability to estimate an informative set of asset weights is highly desirable for analysis. We present a compositional state space model for estimation of an…
LLMs improve stock price forecasting from financial news and reports.
Withdrawal guarantees ensure the periodical deduction of a constant dollar-amount from a fund investment for a fixed number of periods. If the fund depletes before the last withdrawal, the guarantor has to finance the outstanding withdrawals. We derive a robust hedging strategy which leads to closed form solutions for …
An option market maker incurs funding costs when carrying and hedging inventory. To hedge a net long delta inventory, for example, she pays a fee to borrow stock from the securities lending market. Because of haircuts, she posts additional cash margin to the lender which needs to be financed at her unsecured debt rate.…
PolyModel theory and iTransformer improve hedge fund portfolio construction.
In this paper we introduce a novel approach to risk estimation based on nonlinear factor models - the "StressVaR" (SVaR). Developed to evaluate the risk of hedge funds, the SVaR appears to be applicable to a wide range of investments. Its principle is to use the fairly short and sparse history of the hedge fund returns…
This thesis applies entropy as a model independent measure to address three research questions concerning financial time series. In the first study we apply transfer entropy to drawdowns and drawups in foreign exchange rates, to study their correlation and cross correlation. When applied to daily and hourly EUR/USD and…
The paper presents new machine learning methods: signal composition, which classifies time-series regardless of length, type, and quantity; and self-labeling, a supervised-learning enhancement. The paper describes further the implementation of the methods on a financial search engine system to identify behavioral simil…
Examines SOFR derivatives pricing and hedging post-LIBOR discontinuation.
We develop an optimal currency hedging strategy for fund managers who own foreign assets to choose the hedge tenors that maximize their FX carry returns within a liquidity risk constraint. The strategy assumes that the offshore assets are fully hedged with FX forwards. The chosen liquidity risk metric is Cash Flow at R…
The research presented in this work is motivated by recent papers by Brigo et al. (2011), Burgard and Kjaer (2009), Crépey (2012), Fujii and Takahashi (2010), Piterbarg (2010) and Pallavicini et al. (2012). Our goal is to provide a sound theoretical underpinning for some results presented in these papers by developing …
This article presents FVA and CVA of a bilateral derivative in a coherent manner, based on recent developments in fair value accounting and ISDA standards. We argue that a derivative liability, after primary risk factors being hedged, resembles in economics an issued variable funding note, and should be priced at the m…
Funding is a cost to trading desks that they see as an input. Current FVA-related literature reflects this by also taking funding costs as an input, usually constant, and always risk-neutral. However, this funding curve is the output from a Treasury point of view. Treasury must consider Regulatory-required liquidity bu…
We suggest an empirical model of investment strategy returns which elucidates the importance of non-Gaussian features, such as time-varying volatility, asymmetry and fat tails, in explaining the level of expected returns. Estimating the model on the (former) Lehman Brothers Hedge Fund Index data, we demonstrate that th…
Valuation adjustments are nowadays a common practice to include credit and liquidity effects in option pricing. Funding costs arising from collateral procedures, hedging strategies and taxes are added to option prices to take into account the production cost of financial contracts so that a profitability analysis can b…
RL helps optimize TVS fund composition for volatility control.
The inclusion of DVA in the fair-value of derivative transactions has now become standard accounting practice in most parts of the world. Furthermore, some sophisticated banks are including an FVA (Funding Valuation Adjustment), but since DVA can be interpreted as a funding benefit the oft-debated issue regarding a pos…
All the financial practitioners are working in incomplete markets full of unhedgeable risk-factors. Making the situation worse, they are only equipped with the imperfect information on the relevant processes. In addition to the market risk, fund and insurance managers have to be prepared for sudden and possibly contagi…
An uncollateralized swap hedged back-to-back by a CCP swap is used to introduce FVA. The open IR01 of FVA, however, is a sure sign of risk not being fully hedged, a theoretical no-arbitrage pricing concern, and a bait to lure market risk capital, a practical business concern. By dynamically trading the CCP swap, with t…
The main result of this paper is a collateralized counterparty valuation adjusted pricing equation, which allows to price a deal while taking into account credit and debit valuation adjustments (CVA, DVA) along with margining and funding costs, all in a consistent way. Funding risk breaks the bilateral nature of the va…
Activists align with large fund preferences for success.
Study optimizes funding rates for cryptocurrency perpetual futures to maintain price alignment.
New method for valuing and hedging credit risk when defaults cannot be hedged.
In this note we sketch an initial tentative approach to funding costs analysis and management for contracts with bilateral counterparty risk in a simplified setting. We depart from the existing literature by analyzing the issue of funding costs and benefits under the assumption that the associated risks cannot be hedge…
In this paper we solve the hedge fund manager's optimization problem in a model that allows for investors to enter and leave the fund over time depending on its performance. The manager's payoff at the end of the year will then depend not just on the terminal value of the fund level, but also on the lowest and the high…
A leveraged exchange traded fund (LETF) is an exchange traded fund that uses financial derivatives to amplify the price changes of a basket of goods. In this paper, we consider the robust hedging of European options on a LETF, finding model-free bounds on the price of these options. To obtain an upper bound, we establi…
A negative basis trade enters a long bond position and buys protection on the issuer of the bond through credit default swap (CDS), aiming at arbitrage profit due to the bond-CDS basis. To classic reduced form model theorists, the existence of the basis is an abnormality or merely liquidity noise. Such a view, however,…
Study optimal control strategy for hedge funds managers with PSAHARA utility family.
Credit (CVA), Debit (DVA) and Funding Valuation Adjustments (FVA) are now familiar valuation adjustments made to the value of a portfolio of derivatives to account for credit risks and funding costs. However, recent changes in the regulatory regime and the increases in regulatory capital requirements has led many banks…
A model-free hedging method using stock crowding scores.
We propose a long term portfolio management method which takes into account a liability. Our approach is based on the LQG (Linear, Quadratic cost, Gaussian) control problem framework and then the optimal portfolio strategy hedges the liability by directly tracking a benchmark process which represents the liability. Two…
The paper compares traditional regression with modern neural network methods for financial hedging and risk compression.
In this work we study the price-hedge issue for general defaultable contracts characterized by the presence of a contingent CSA of switching type. This is a contingent risk mitigation mechanism that allow the counterparties of a defaultable contract to switch from zero to full/perfect collateralization and switch back …
Bayesian MS-VAR model for pricing equity-linked life insurance products.