Introduction
Understanding hedge fund risk: what is risk? How do hedge fund risks differ from those of traditional investment strategies? A review of the market, credit, liquidity and operational risks associated with Hedge Fund investments.
Traditional Investment Risk Measurement
Understanding market and credit risk related to a diverse range of Hedge Fund investment strategies. Why the most basic risk measurements such as standard deviation and confidence levels fail to measure hedge fund risk adequately. What is ETL (Extended Tail Loss). Where is VaR helpful and where is it off target? Monte Carlo simulations: an effort to pick up where VaR falls off. Stress testing including key drivers and factor analysis. Measuring and reporting of investment risk by hedge funds to investors. How diversification and or structured products effect Hedge Fund risk profiles.
Exercise: Delegates will be asked to rank seven hedge funds according to their risk.
Operational, Liquidity, Regulatory, Legal & Counterparty Credit Risk
How do you compare procedures? How do you quantify operational risk management practices? What is operational and liquidity? Hedge fund manager considerations: instrument liquidity, redemption liquidity, financing liquidity; Fund-of-fund manager considerations: Lock-ups, payments in kind, liquidity mismatches, coupon and corporate action errors, fails etc. Overview of US regulatory trends, discussion of the impact of higher regulation on fund operations, risk and returns. Legal/entity risk. How does a hedge fund manage its counterparty risk? How do dealers treat funds? Should Hedge Funds provide credit protection to institutions? Why arent Hedge Funds rated?
Portfolio Diversification as a Risk Management Tool
How do multi-strategy hedge funds and fund of funds effect risk? Who are the major players, and how are fees charged? What is the role of structured products and PPN as risk mitigants, but at what cost?
Exercise: Identification and classification of investment risks in a hedge fund portfolio.
Role of Technology in Risk Mitigation and Reporting
Electronic forms of information: to gather position data from manager, prime broker and counterparties; to reconcile positions independently; to analyze risk using VaR, stress-testing, correlation analysis, concentration analysis; to calculate a daily (or real-time) NAV; to report NAV and risk information in a customized and client-friendly format.
Role of Fund Administrators, Auditors and Independent Valuations in Mitigating Risk
Are fund administrators helpful in mitigating risk? What are the pros and cons of independent valuation and marking to model of illiquid and complex securities. What reliance is placed on independent audits?
| Why Hedge Funds Fail: A Case Study Based on Long Term Capital
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Transparancy: The Great Debate
Different kinds of transparency; When is there too much transparency? When can transparency harm rather than protect?
Case Study
Evaluating a Hedge Fund Pitch Book and Reporting Package
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