Hedge Fund Risk Fundamentals is the first book to bring these issues to the forefront. With clarity, concision, and minimal math, Richard Horwitz lays out the key components and the cutting-edge processes in the field of hedge fund risk management today. Against that backdrop, he presents a groundbreaking utility destined to set the standard for transparency and risk management within the hedge fund universe.
You’ll learn why, when it comes to risk management, 1 + 1 = 1.41. For all of those perplexed by the difficulties of assessing risk in hedge fund investing, Horwitz’s concepts make for an invaluable road map and a demystifying resource that hedge funds and investors at all levels will find indispensable.
Part One: The Components of Risk.
Risks in Hedge Funds versus Traditional Investments.
The Distribution of Hedge Fund Returns.
Value at Risk (VAR).
The Power of Diversification.
What Is the Right Amount of Leverage?
Planning in Case of Crisis.
The Size Factor.
Elements in an Escape Plan.
The Cost of Illiquid Redemption Policies.
Choosing among Alternatives.
Calculating the Opportunity Cost of Illiquidity.
Part Two: Market Risk Management.
5 Measuring Risk.
Normal Market Behavior.
Will History Repeat?
Risk Measures Based on Actual Fund Returns.
Risk Measures Based on Simulated Fund Returns.
Crisis Market Behavior.
6 Understanding the Source of Risk.
Slicing and Dicing or Bucketing.
Value at Risk (VaR).
Marginal Risk Measures.
7 Risk Visualization and Articulation.
Risk Visualization Techniques.
Communicating Risk in "Hedge-Speak".
8 Risk Culture.
Integrating Risk Management into All Hedge Fund Processes.
Style Drift versus Nimbleness.
Part Three: Other Risk Processes.
9 Non-Market Risk Management.
Systems and Procedures.
10 Constructing a Fund.
Value Creation Levers.
Establishing a Basis in which to View the Construction.
Balancing Risk and Return.
11 Performance Attribution.
Assessing Primary Sources of Returns.
Other Factors in Performance Attribution.
12 Risk Budgeting.
Risk Budgeting Self-Assessment.
Definition of Risk Budgeting.
Formal Risk Budgeting.
A Management Process, Not a Back-Office Tool.
A Common Language.
Managing Complex Causal Relationships.
A Comprehensive and Integrated Approach.
Integrated Systems Support the Process.
How Formal Should Your Risk Management Be?
Part Four: Risk from the Investor's Viewpoint.
13 NAV/Return Reporting.
Lack of Documentation.
Lack of Precision.
Dressing Up Returns.
14 Constructing a Portfolio of Funds.
Integrating Asset Allocation, Manager Selection, and Portfolio Construction.
Understand Manager Risks.
Understand Your Objective.
Adopt a Prospective Outlook.
Focus on Marginal Risk and Return Measures.
Construct the Portfolio Incrementally.
Minimize Exposure to the Underlying Market.
Manage Secondary Risk Exposures.
Maximize Idiosyncratic Risks.
Limit Offsetting Exposures.
Diversify the Portfolio.
Plan for the Worst.
Consider Using Optimizers.
15 Risk Due Diligence.
Analyzing Previous Portfolios.
Determining Transparency and Risk Culture.
Changing Investor Requirements.
The Political Environment.
The Pros and Cons of Position Disclosure.
Part Five: The Solution.
17 Industry Standard Solution.
Reporting Standards - A Common Language.
The Case for Standardization.
18 The Risk Fundamentals Solution.
Overview of the Service.
The Risk Fundamentals System.
The Risk Fundamentals Statistics.
Standardization with Flexibility.
Risk Budgeting Support.
Effective Risk Communication.
Interpreting Risk Management Reporting.
Constructing a Fund.
Constructing a Portfolio of Funds.