Should VaR for a portfolio of funds use look-through holdings or fund-level returns?

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AcadiFi · Accepted Answer

The choice depends on data quality and the decision being supported. Fund-level return VaR is simpler and captures the realized behavior of the fund, including manager actions, fees, and implementation. Look-through VaR uses underlying holdings and can show current exposure more precisely, but it requires timely and reliable position data.

Suppose Pine Ridge Allocation holds five daily-traded funds. Fund-level history suggests the portfolio has modest one-day VaR because past returns were stable. A look-through view reveals that two funds now hold overlapping credit exposure and similar duration risk. If holdings changed materially, the fund-level history may understate current concentration. If holdings data is stale or incomplete, look-through VaR may create false precision.

The best answer is often hybrid. Use look-through analysis when current exposures matter and holdings are available. Use fund-level returns to capture manager behavior and real implementation history. Reconcile the two when they disagree. FRM candidates should avoid treating either method as automatically correct. VaR is only useful if the risk representation matches the actual portfolio and the question management is asking. On the exam, also state the horizon, confidence level, data source, modeling assumption, and validation step, because those choices usually explain why two reasonable VaR answers differ materially. Practice more in our FRM question bank.

Should VaR for a portfolio of funds use look-through holdings or fund-level returns?

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