"And now for something completely different ..."
John Cleese
We've been asked about quantification and monitoring of risk for hedge fund managers. It's a process that tends to be dramatically different from what banks or insurance firms undergo. Hedge funds develop risk measures that are both highly dynamic and practical in nature. Here is a generic list of considerations (sent by a Sober Look reader)- a more comprehensive list would of course vary by strategy.
Measuring portfolio leverage and directionality
o Gross
vs. net leverage measures
o Beta
adjusted vs. net notional exposure (are you long or short?)
o Combining
credit and equity risks into a single exposure
o The
use/limitations of basic spread and rate risk measures (portfolio duration, CS01,
etc.)
Working with beta measures
o Asymmetry
o Stability
o Can
beta methodology be effectively applied to credit?
o Managing
basis risks
o Choosing
a benchmark index for the portfolio
· Working with highly nonlinear portfolios
o Developing
practical portfolio scenarios, including
historical simulations
o Practical
uses of portfolio option greeks.
o Tracking
portfolio duration under various conditions :
§ prepayment
speeds,
§ spread
shocks,
§ yield
curve slope, etc.
· Measuring “tail risks”
o Conditional
(“tail”) value-at-risk
o Spectral
risk measures (overweighing certain adverse outcomes)
o Managing
macroeconomic stress tests – what’s considered “extreme but realistic”?
· Exploring hedging techniques
o Treasuries
or currencies as macro hedges
o Credit
CDS indices (CDX) and credit swaptions
o Equity
options, binary options, and other
overpriced products etc.
o Other
Assessing and managing liquidity risk
o Stress
testing margin requirements and leverage sustainability
o Assessing
investor redemption risks
o Determining
liquidation periods for portfolio components
o Assessing
cash balance requirements
Tracking countrparty risk
o Measuring the health of swap counterparties and prime brokers
o Cash and fully-paid-for securities segregation and monitoring
Note: risk adjusted performance measures and performance attribution will be discussed at a later stage.
We would like to hear from Sober Look readers. What's missing? What should be expanded?
SoberLook.comFrom our sponsor:
