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Managing Risk in Alternative
Investment Strategies: Hedge Funds
Alternative Investment Strategies
(AIS) exist across a variety of
different asset classes
(including equity, fixed income and
foreign exchange) on both a
directional and non-directional
basis.
Hedge Funds, the classic example of
an AIS investor take advantage of a
flexible approach to...
multiple asset classes, trading styles,
markets, leverage, short-selling and
liquidity.
Typical investors include high net
worth and institutional investors i.e.
pension funds and endowments
(longer term view, high levels of risk
aversion, who emphasis stability of
investment returns...
An understanding about how past
returns were generated is
imperative to successful asset
allocation.
Past performance may not
evidence potential risk factors.
Access to regular information about
a manager’s trading activities allows
not only for changes in style,
but can also help to quickly
recognize and address any undesired
bets or leverage increases.
Investors must understand how
numerous macroeconomic factors
influence the performance of the
individual strategies.
The systematic market risk of the
individual strategy sector is what
earns most strategies their return in
the form of a r...
In pursuing sector and manager
diversification,
an investor needs a detailed
understanding of the correlations
between strategy sectors and asset
classes in different mar...
A thorough understanding of the
market conditions that might reduce
a manager’s edge...
would have enabled investors to exit
Long Term Capital Management
prior to its collapse.
Reported NAVs often do not take
into account the liquidity of open
positions,
especially when a position is large
compared to daily trading volume of
the asset (such as that of Distressed
Debt).
Suitable sector allocation can be
ensured through clear investment
objectives, performance targets and
well defined risk p...
Hedge fund managers monitor the
interrelated exposure to market risk
(including asset risk),
funding liquidity risk, credit risk
(debt investments, counter-party
risk) and operational risk.
Investor concerns include broad and
diverse asset risk (heterogeneity),
lack of transparency, and low
liquidity (relatively long redemption
periods often at the option of AIS
managers).
In order to cope with the risk of a
severe loss, continuous monitoring
of exposures and risk is necessary,
permitting the early identification of
any deviations from a stated
strategy.
Effective risk management
begins with the ability to control.
“Blackbox” investing is more and
more unsuitable from either a
fiduciary or principal perspective.
The threat of being copied or
actively traded against had come
largely from the dealer community
and the investment bank proprietary
trading desks rather than from AIS
allocators or direct investors.
This risk may be abating due to the
Volcker Rule, or simply moving to
newer or different platforms.
However, increased risk resulting
from previously known and
accepted exposures, cannot be
entirely eliminated.
In order to present a clear edge, a
manager must be willing to openly
explain to investors any changes in
its portfolio ri...
Managing Risk in Alternative
Investment Strategies: Hedge Funds
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Managing Risk In Alternative Investment Strategies - Hedge Funds

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A description of Alternative Investment Strategies from economist and finance professional Mark Tuminello.

Published in: Economy & Finance, Business
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Managing Risk In Alternative Investment Strategies - Hedge Funds

  1. 1. Managing Risk in Alternative Investment Strategies: Hedge Funds
  2. 2. Alternative Investment Strategies (AIS) exist across a variety of different asset classes
  3. 3. (including equity, fixed income and foreign exchange) on both a directional and non-directional basis.
  4. 4. Hedge Funds, the classic example of an AIS investor take advantage of a flexible approach to...
  5. 5. multiple asset classes, trading styles, markets, leverage, short-selling and liquidity.
  6. 6. Typical investors include high net worth and institutional investors i.e.
  7. 7. pension funds and endowments (longer term view, high levels of risk aversion, who emphasis stability of investment returns).
  8. 8. An understanding about how past returns were generated is imperative to successful asset allocation.
  9. 9. Past performance may not evidence potential risk factors.
  10. 10. Access to regular information about a manager’s trading activities allows not only for changes in style,
  11. 11. but can also help to quickly recognize and address any undesired bets or leverage increases.
  12. 12. Investors must understand how numerous macroeconomic factors influence the performance of the individual strategies.
  13. 13. The systematic market risk of the individual strategy sector is what earns most strategies their return in the form of a risk premium.
  14. 14. In pursuing sector and manager diversification,
  15. 15. an investor needs a detailed understanding of the correlations between strategy sectors and asset classes in different market environments.
  16. 16. A thorough understanding of the market conditions that might reduce a manager’s edge...
  17. 17. would have enabled investors to exit Long Term Capital Management prior to its collapse.
  18. 18. Reported NAVs often do not take into account the liquidity of open positions,
  19. 19. especially when a position is large compared to daily trading volume of the asset (such as that of Distressed Debt).
  20. 20. Suitable sector allocation can be ensured through clear investment objectives, performance targets and well defined risk parameters.
  21. 21. Hedge fund managers monitor the interrelated exposure to market risk (including asset risk),
  22. 22. funding liquidity risk, credit risk (debt investments, counter-party risk) and operational risk.
  23. 23. Investor concerns include broad and diverse asset risk (heterogeneity),
  24. 24. lack of transparency, and low liquidity (relatively long redemption periods often at the option of AIS managers).
  25. 25. In order to cope with the risk of a severe loss, continuous monitoring of exposures and risk is necessary,
  26. 26. permitting the early identification of any deviations from a stated strategy.
  27. 27. Effective risk management begins with the ability to control.
  28. 28. “Blackbox” investing is more and more unsuitable from either a fiduciary or principal perspective.
  29. 29. The threat of being copied or actively traded against had come largely from the dealer community
  30. 30. and the investment bank proprietary trading desks rather than from AIS allocators or direct investors.
  31. 31. This risk may be abating due to the Volcker Rule, or simply moving to newer or different platforms.
  32. 32. However, increased risk resulting from previously known and accepted exposures, cannot be entirely eliminated.
  33. 33. In order to present a clear edge, a manager must be willing to openly explain to investors any changes in its portfolio risk.
  34. 34. Managing Risk in Alternative Investment Strategies: Hedge Funds

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