By their very nature, hedge funds often take leveraged positions using derivatives in often illiquid markets, all of which make hedge funds prone to a wider variety of risks than one would find in other investment vehicles.
Following the losses that resulted from the credit crisis and exposure of the Madoff Ponzi scheme, risk management has become a pressing priority for hedge funds. It should be pointed out that the issues dealing with risk management are not unique to hedge funds; many of the issues discussed below also apply to banks, investment banks, and other investment managers.
A partial list of hedge fund risks includes the following:
• Market risk: Because of their leveraged positions, hedge ...