Study: Hedge Funds Improve Risk Management

Sep 10 2012 | 8:46am ET

New research suggests hedge funds are continuing to beef up risk management, and well they might: the report says they face 14 distinct forms of risk.

Risk Roadmap: Hedge Funds and Investors’ Evolving Approach to Risk, a study by the Managed Funds Association, BNY Mellon and HedgeMark based on interviews with chief risk officers of “leading global hedge funds," found that 91% employed a third party administrator in some risk management capacity. Moreover, the risk officers surveyed expect that in five years, 41% of investor reporting will be published daily or weekly, up from 22% today and just 12% in 2007.

The study also found that 79% of firms now separate risk manager and fund manager functions; that 55% of firms considered liquidity risk their highest priority; that 60% of larger hedge funds have a dedicated risk management function and 84% use off-the-shelf risk analytics for portfolio management or trading.

The study says hedge fund managers confront 14 different types of risk, including liquidity, volatility, credit currency, commodity and ‘meta’ risk—the latter being qualitative risks that can’t be easily measured, like human and organizational behavior, or moral hazard.

“Today’s hedge funds are operating in a dramatically different environment than five or 10 years ago, dedicating more resources to risk management and communicating more frequently with investors,” said Richard Baker, MFA president and CEO, in a statement.“Improvements to internal governance, independent transparency, quality and frequency of reporting can go a long way to strengthen the partnership between investors and fund managers. As the industry continues to evolve, we will see even more attention given to risk management, helping managers and allocators work together to navigate global markets.”

The study suggests that new rules—like those imposed by Basel III, Dodd-Frank and the EU’s market infrastructure regulation—are making hedge funds “increasingly more willing to tell their story in plain language with a keen focus on sharing and explaining their risk approach.”


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