Chapter 55. Assessing Hedge Fund Investment Risk in Common Hedge Fund Strategies

ELLEN J. RACHLIN

Managing Director-Portfolio & Risk Manager, Mariner Investment Group, Inc.

Abstract: A key task for the professional hedge fund investor is to look for exposures which are vulnerable to losses during times of increased market volatility or large market dislocations. The professional hedge fund investor should assess continually the market environment for changes in volatility and liquidity so that portfolio risks can be anticipated. Securities present differently in a portfolio's risk metrics under different volatility and liquidity scenarios. This chapter examines many of the key portfolio risks which may be present in the major hedge fund strategies: government bond arbitrage, mortgage-backed security arbitrage, corporate bond arbitrage, emerging markets, capital structure arbitrage, distressed securities, merger arbitrage, long/short equity, multi-strategy, market-neutral equity, and convertible bond arbitrage.

Keywords: government bond arbitrage, mortgage-backed security arbitrage, corporate bond arbitrage, emerging markets, capital structure arbitrage, distressed securities, merger arbitrage, long/short equity, multistrategy, market neutral equity, convertible bond arbitrage, leverage, volatility, liquidity, position concentration, tail risk

Professional hedge fund investor, including fund of funds managers, consultants, and others serving in an advisory role must not only understand ...

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