Hedge Fund Risk Winter 2010

By Simon Gray – The alternative investment management industry has already had to come to terms with a wholesale shake-up in attitudes toward risk assessment and management in response to demand from investors. They are no longer willing to take on trust promises that managers are doing what they say they’re doing. In addition, investors need assurance that managers are equipped with all the tools and system necessary to protect themselves not only against the predictable volatility of markets but unlikely and improbable events too. »

By Lance Smith - The market turbulence of the past three years has exposed a number of flaws and limitations in traditional approaches to risk management. In the aftermath of the crisis, investors are increasingly pressuring alternative investment managers to ensure the most advanced and appropriate tools and methodologies are being used to deliver the most robust risk management process possible. »

By Paul Compton - The traumatic crisis that engulfed the industry two years ago prompted a renewed concern among many hedge fund managers to gain control over their positions and exposures. Traumatised investors started asking managers many more questions about how positions were being valued, and even, in the wake of Madoff, whether the assets the fund claimed actually existed. This greater activism on the part of investors has turned out to be a lasting phenomenon, with managers under pressure to answer questions continually about their investment exposures and operational risk. »

By Simon Gray - Risk is the element that hedge fund managers above all others, are supposed to thrive on, but members of the industry long ago understood that there are many more facets to the concept than the market volatility that brings opportunities to the strong-nerved. Indeed, the past few years have highlighted the factors memorably described by US Secretary of Defence Donald Rumsfeld, in another context, as “unknown unknowns” – risks that could not be protected against because their very possibility was not conceived of. »

By Doug Nairne - One of the most important changes in the global financial industry over the past three years, and indeed the business environment as a whole, is the increased importance placed upon due diligence. That means paying closer attention not just to counterparties in order to detect any evidence of fraud – although this is certainly a vital component – but also wider issues, especially legal ones, to see whether they could have any detrimental effect on a firm’s business. »