The 2008 financial tsunami shook the global economic landscape. This study set out to determine the impact – if any – the tsunami had on the return volatility of hedge funds, and how this impacts hedge fund risk control and investment decisions, as this had yet to be determined within the academic and business fields. This was done through applying the methodology of autoregressive conditional heteroscedasticity (ARCH) and generalized ARCH (GARCH) models. In order to determine whether the specific event of the financial tsunami has had a significant prolonged impact on the volatility of the data, a dummy variable was set to distinguish the data by the event. Before the event, the dummy variable was set to be zero; after the event, the dummy variable was set to be one. Of the six Hedge Fund Research (HFR) indices’ return volatilities investigated, three (Equity Market Neutral, Relative Value Arbitrage, and Absolute Return) were found to have increased after the financial tsunami, one (Global Hedge Fund) was found to have the decreased, and two (Equity Hedge and Macro) were found to have not been significantly impacted by the tsunami. For those return volatilities that were impacted by the tsunami, the study determined that the model to be used should be the GARCH model which includes the dummy variable, in order to allow hedge fund managers and investors to more precisely make risk-control limitation allocations and conduct return-risk trade-off judgements. For the Equity Hedge and Macro indices, the original GARCH model should be used.

Ahn, C. Y. (2009). South Korea: Wary of another financial crisis. Global Asia, 3(4), 34-43.
Amenc, N. & Martellini, L. (2002). The brave new world of hedge fund indexes. Working paper, EDHEC/MISYS Multi-style/multi-class Research Program, 1-46.
Amin, G. S. & Kat, H. M. (2003). Hedge fund performance 1990–2000: Do the “money machines” really add value? Journal of Financial and Quantitative Analysis, 38(2), 251-274.
Bekaert, G. & Harvey, C. R. (1997). Emerging equity market volatility. Journal of Financial Economics, 43(1), 29-77.
Bodart, V. & Reding, P. (1999). Exchange rate regime, volatility and international correlations on bond and stock markets. Journal of International Money and Finance, 18(1), 133-151.
Bollerslev, T. (1986). Generalized autoregressive conditional heteroscedasticity. Journal of econometrics, 31(3), 307-327.
Cao, L. Q. (2009). Financial Tsunami: An analysis of its spreading routes and options of countermeasures. Shenzhen University Journal (Humanities & Social Sciences), 26(1), 141-150.
Desmet, T. O. (2008). Understanding hedge fund adviser regulation. Hastings Bus. LJ 4(1), 1-15.
Edwards, F. R. (1999). Hedge funds and the collapse of long-term capital management. Journal of Economic Perspectives, 13(2), 189-210.
Engdahl, F. W. (2008). The Financial Tsunami. Montreal: Global Research.
Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50, 987-1007.
Eurekahedge Pte. Ltd. (2010). Hedge fund databases. Retrieved September 20, 2010, from http://www.eurekahedge.com/database/faq.asp#1
Evans, J., Beddingfield, E., Graybeal, M., Graybill, C., Jones, K., Jeon, H., Mundy, J., Murray, B. C., O’Donnell, E., Restaino, S., Spillman, A., Stoney, S., Warlick, M., & Greenlaw, S. A. (2009). 2008 financial crisis and global recession. Retrieved July 11, 2010 from http://2008financialcrisis.umwblogs.org.
Fuss, R., Kaiser, D. G., & Adams, Z. (2007). Value at risk, GARCH modeling and the forecasting of hedge fund return volatility. Journal of Derivatives & Hedge Funds, 13(1), 2-25.
Giacometti, R., Rachev, S. T., Sessa, V., & Musicco, L. (2008). Funds of hedge funds: A comparison among different portfolio optimization models implementing the zero-investment strategy. Working paper, University of Bergamo, Italy and University of California, Santa Barbara, U.S., 1-25.
He, G. Q. & Luo, X. (2009). On the risks of financial innovation and its legal supervision concept-under the background of world wide financial tsunami. Journal of Political Science and Law, 26(1), 71-80.
Hedge Fund Research, Inc. & Bloomberg Finance L.P. (2010). Global Hedge Index. Retrieved October 11, 2010, from the Bloomberg terminal.
Jorion, P. (1997). Value at Risk: The new benchmark for controlling market risk. New York: McGraw-Hill.
Jorion, P. (2000). Risk management lessons from long-term capital management. European Financial Management, 6(3), 277-300.
Kang, B. U., In, F., Kim, G., & Kim, T. S. (2007). Investment horizon effects on dependence structure between hedge funds and the equity market. Working paper, Korea Advanced Institute of Science and Technology, Republic of Korea & Monash University, Australia, 1-40.
Ledoit, O. & Wolf, M. (2008). Robust performance hypothesis testing with the Sharpe ratio. Journal of Empirical Finance, 15(5), 850-859.
Ljung, G. M. & Box, G. E. P. (1978). On a measure of lack of fit in time series models. Oxford Journals - Mathematics & Physical Sciences - Biometrika, 65(2), 297-303.
Longin, F. & Solnik, B. (1995). Is the correlation in international equity returns constant 1960-1990. Journal of International Money and Finance, 14(1), 3-26.
Loomis, C. J. (1966). The Jones nobody keeps up with. Fortune, April 1966, 237-247.
MacKenzie, D. (2003). Long-Term Capital Management and the sociology of arbitrage. Economy and Society, 32(3), 349–380.
McNeil, A. J., Frey, R., & Embrechts, P. (2005). Quantitative Risk Management: Concepts Techniques and Tools. Princeton, NJ: Princeton University Press.
Munnell, A. H., Aubry, J. P., & Muldoon, D. (2008). The financial crisis and state/local defined benefit plans. Working paper, Center for Retirement Research at Boston Col¬lege, U.S., 1-9.
Naiwen, H. (2009). Economic performance and trends of southeast asian countries under the impact of the U.S.'s financial crisis. Southeast Asian Studies, 1(5), 42-51.
Pao, H. Y., Chen, S. C., & Wu, J. C. (2003). A research on the announcement effect of and the impact on stock price volatility of the issuing overseas depository receipts of companies. Working paper, Department of Business Administration, Shih Chien University, 54-73
Schneeweis, T. & Spurgin, R. (2000). Hedge funds: Portfolio risk diversifiers, return enhancers or both? Working paper, CISDM/Isenberg School of Management, University of Massachusetts, 1-6.
Schwarz, G. E. (1978). Estimating the dimension of a model. Annals of Statistics, 6 (2), 461–464.
Scott, H. S. (2010). The next step in global financial regulation: Global regulation of interconnectedness. Global Policy, 1(3), 332-333.
Sharpe, W. F. (1994). The Sharpe ratio. Journal of Portfolio Management, 21(1), 49–58.
Stonham, P. (1999). Too close to the hedge: The case of long term capital management LP: Part one: Hedge fund analytics. European Management Journal, 17(3), 282-289.
Theodossiou, P. & Lee, U. (1995). Relationship between volatility and expected returns across international stock markets. Journal of Business Finance & Accounting, 22(2), 289-300.
Walker, G. (1931). On periodicity in series of related terms. Proceedings of the Royal Society of London, Ser. A,(131), 518-532.
Wong, D. K. T. & Li, K. W. (2009). Comparing the performance of relative stock return differential and real exchange rate in two financial crises. Applied Financial Economics, 20(1-2), 137-150.
Wu, J. L. (2009). The financial tsunami and China's economy. Journal of Shanghai University (Social Sciences Edition), 1, 1-15.
Xie, B. H. (2009). The inspiration to China from the comparative study on the United States "financial tsunami" and Japanese "economical bubble." Economic Management Journal, 4(10), 31-40.
Yan, Z. (2009). How to handle main employment problem under financial crisis. Special Zone Economy, 8, 51-55.
Yang, Y. N. (2009). Time series analysis in economics and finance.Taipei: Yeh Yeh.
Zikovic, S. (2008). Calculating VaR in EU candidate states. South East European Journal of Economics and Business, 3(1), 23-33.