Everyone, or at least much of the investing public, knows that hedge funds are risky investments, right? Well, the U.S. Treasury Department’s new Office of Financial Research has preliminarily concluded that this conventional wisdom may be off base.
In remarks at the Brookings Institution last week, OFR director Richard Berner reported preliminary findings based on data from some 6,000 hedge funds.
Berner said that hedge funds with the highest leverage had less than 5% of hard-to-value assets in their portfolios, while those with no leverage contained about 20% of such assets. He emphasized that “this is a tentative conclusion, but one that probably bears further investigation.”
In addition, the OFR analysis examined whether a given fund calculated value at risk, and found “not a crystal clear relationship,” but one “suggestive of the idea that funds with higher leverage were somewhat more likely to calculate value at risk.”
Finally, Berner said, the data showed that on average, funds that reported higher levels of value at risk also tended to report low leverage. But he added, “We can’t put too much weight on this result without alternative measures of portfolio risk to confirm it.”