Hedge funds reporting their risk exposures to the Securities and Exchange Commission use one method, Form PF, regardless of how dissimilar their risk profiles may be, but it can still help regulators measure market risk exposure with further stratification, said a study released Thursday by the Office of Financial Research.
OFR researchers used a range of simulated portfolios to assess Form PF, and found that the measurement tolerances “are sufficiently large to allow private funds with dissimilar actual risk profiles to report similar risks to regulators.”
“We also find that the form’s stratification by value at risk … helps significantly to narrow the measurement tolerances,” the authors said.
“For example, the maximum expected shortfall for our factor-alpha strategy across our sample of portfolios varies from 85% to 278% above the median value in four versions of expected shortfall. On the other hand, we also find that the form’s stratification by value at risk, under Form PF question 40, significantly reduces the range of possible differences between reported and actual market risk exposures,” they said.
The report, “Gauging Form PF: Data Tolerances in Regulatory Reporting on Hedge Fund Risk Exposures,” is available on the OFR’s website.