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Managing Hedge Fund Risk and Financing: Adapting to a New Era
John Wiley and Sons Ltd, Oct 2011, Pages: 320
Hedge funds experienced a new challenge during the recent financial crisis: the simultaneous collapse of major financial institutions that were their trading counterparties and service providers, fundamental and systemic increases in market volatility and illiquidity which led to mark to market losses and increased demands for margin from their creditors, and lastly unrelenting demands from investors to redeem their hedge fund investments. Many hedge funds were unprepared for the maelstrom that engulfed them and many have failed or been forced to close due to resulting poor performance.
This book encapsulates the lessons learned from the recent crisis and advises hedge fund managers and CFOs how to manage the risk of their investment strategies and structure relationships to best insulate their firms and investors from failure of financial counterparties so that their funds can remain free to take full advantage of opportunities presented by financial crises.
Risk management and maintaining funding liquidity are critical to differentiating a funds performance in a crisis. Avoidance of losses in the funds investment portfolio via effective risk management is only part of the solution. Having the ability to maintain or increase leverage and liquidity due to having negotiated binding lock ups and committed facilities with your prime brokers, and matching portfolio liquidity with potential investors redemption demands are also critical to maintaining a funds ability to opportunistically profit from a crisis.
Reviews:
What makes this book special is that it presents an insider’s perspective of what went right, what went wrong, and what are the lessons learned from the crisis. David Belmont had a front row seat and role to play with hedge funds as a crisis scenario few had contemplated played out—a scenario with not only huge investment risks, but also counterparty, funding, and operational risks. Want to know what really happened to hedge funds during the financial crisis? The holistic view is presented here: how to manage a hedge fund with investment, funding, counterparty and operational risks in mind.
- Bob Litterman, Partner, Kepos Capital (a New York-based hedge fund), Former Partner and Head of Firm-wide Risk Goldman Sachs
David Belmont has written a rather well-researched, thoughtful book on managing hedge fund risk that serves well as a reminder for what hedge fund CIOs, CFOs, and COOs need to think about before they use leverage in their business. The book is written in a style accessible to the lay reader as well as the industry-savvy risk manager. The experience of the managers of the Icarus fund possibly represents what a lot of large well-pedigreed fund managers went through as the Financial Crisis of 2007/2008 developed. I expect it to be received extremely well by people on the buy and sell sides alike.
- Satish Ramakrishna, Head, Prime Services Risk and Complex Financing, Global Markets Equity, Deutsche Bank
David Belmont’s Managing Hedge Fund Risk and Financing is a must-read for anyone investing in, or working for, a hedge fund. David does a superior job of providing both a comprehensive and understandable framework for thinking about hedge fund risk, as well as great detail for understanding, analyzing and managing various risks associated with different types of hedge funds. In particular, the book highlights often overlooked risks including funding and counterparty risk. I learned a lot as a result of reading the book and gave copies to the hedge fund and risk management teams at UTIMCO.
- Bruce Zimmerman, CEO and CIO, The University of Texas Investment Management Company (UTIMCO)
Written by a seasoned risk professional, David Belmont’s new book contains a wealth of insights on how hedge fund risk ought to be managed. The clear and direct writing style makes even complex and arcane issues easy to understand. This book should be of interest to hedge fund managers and investors alike.
- Sung Cheng Chih, Chief Risk Officer, Government of Singapore Investment Corp. (GIC)
Hedge fund managers, administrators, prime brokers and those with risk oversight will find this book informative. It is a practical and implementable guide for risk management and oversight of hedge fund risks and financing with a detailed discussion on liquidity and funding risk management.
- Timothy M. Curran, CFA, Managing Director, Citigroup Risk Management
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