Risk management of UCITS compliant funds

Abstract

Accurate risk estimation plays an important role in effective risk management. Nowadays, there are a lot of ways how risk can be measured; however, the most common method is Value at Risk (VaR), which can be calculated by using various approaches. This paper focused on measuring the parametric VaR models for Undertakings for Collective Investment in Transferable Securities (UCITS) compliant funds and analysed RiskMetrics, which is the most common type of approach used in order to compute VaR. The aim of this paper is to analyse the VaR of various UCITS compliant funds of different fund houses covering the period from 2003 till 2015. The VaRs under study involves the n-VaR, t-VaR and CF-VaR. Using a unique set of data based on two different strategies of equity and fixed income and taking into consideration a 99 per cent confidence interval on a 12 year horizon, the funds under study show significant differences when taking into consideration the period that they’re in, either being a tranquil or turmoil period. Returns suffered a lot during the credit crunch, where all funds showed a negative return, except for a government bond fund, depicting a positive return, which shows that people shifted their assets from risky to safe assets during this distressed period.