July 27, 2006

Hedge Fund Risk Management

The increased focus on hedge fund risk transparency is part of the natural evolution towards institutionalization that occurred in the hedge fund world in the past few months. The investors’ base for hedge funds expanded beyond its traditional core of individuals. It now covers pension plan sponsors and foundations among others. Institutional investors are having 100 percent access to the securities used by their traditional managers. Here the question is does an institutional investor really need position level transparency? Risk management plays an important role in addressing these concerns of investors.

With risk tools, position level transparency allows institutional investors to create their own independent risk analysis of the funds in which they invest. They can also aggregate risks and exposures across their hedge funds and fund of funds portfolios. In reality, the institutional investors need position level risk transparency from the hedge funds and funds of funds. However, only few are equipped to effectively deal with this type of transparency. You will definitely acknowledge that risk management is crucial to the success of hedge fund operations.

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