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Hedge Fund Risk Fundamentals: Solving the Risk Management and Transparency Challenge

Book Description

In the constantly evolving hedge fund marketplace, nothing is more central--but in many ways, more amorphous and elusive--than risk. Yet there remains no standard for analyzing and measuring risk within this highly secretive, largely unregulated field, leaving the thousands of hedge funds--and the tens of thousands of hedge fund investors--in dangerously dim light. The industry has not solved the "transparency" challenge--communicating risk to investors without disclosing proprietary information.

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.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. Dedication
  5. Contents
  6. Acknowledgments
  7. Foreword
  8. Preface
  9. Introduction
    1. What Are Risk Fundamentals?
    2. The Risk Fundamentals ® Solution
  10. Part One: The Components of Risk
    1. CHAPTER 1: Volatility
      1. Risks in Hedge Funds versus Traditional Investments
      2. The Distribution of Hedge Fund Returns
      3. Value at Risk (VaR)
    2. CHAPTER 2: Diversification
      1. The Power of Diversification
      2. Systematic Biases
      3. Overdiversification
    3. CHAPTER 3: Leverage
      1. Financing Leverage
      2. Unlevered Risk
      3. What Is the Right Amount of Leverage?
    4. CHAPTER 4: Illiquidity
      1. Planning in Case of Crisis
      2. The Size Factor
      3. Elements in an Escape Plan
      4. The Cost of Illiquid Redemption Policies
  11. Part Two: Market Risk Management
    1. CHAPTER 5: Measuring Risk
      1. Sell-Side Heritage
      2. Normal Market Behavior
      3. Crisis Market Behavior
    2. CHAPTER 6: Understanding the Source of Risk
      1. Slicing and Dicing or Bucketing
      2. Index-Based Benchmarks
      3. Value at Risk (VaR)
      4. Risk-Factor Framework
      5. Marginal Risk Measures
    3. CHAPTER 7: Risk Visualization and Articulation
      1. Comparative Statistics
      2. Risk Visualization Techniques
      3. Communicating Risk in “Hedge-Speak”
    4. CHAPTER 8: Risk Culture
      1. Integrating Risk Management into All Hedge Fund Processes
      2. Style Drift versus Nimbleness
      3. Personality Risks
  12. Part Three: Other Risk Processes
    1. CHAPTER 9: Non-Market Risk Management
      1. Systems and Procedures
      2. Organizational Issues
      3. Disciplined Processes
    2. CHAPTER 10: Constructing a Fund
      1. Value Creation Levers
      2. Shorting
      3. Illiquid Securities
      4. Leverage
      5. Convexity
      6. Nimbleness
      7. Establishing a Basis in which to View the Construction
      8. Balancing Risk and Return
    3. CHAPTER 11: Performance Attribution
      1. Assessing Primary Sources of Returns
      2. Other Factors in Performance Attribution
    4. CHAPTER 12: Risk Budgeting
      1. Risk Budgeting Self-Assessment
      2. Definition of Risk Budgeting
      3. Formal Risk Budgeting
      4. How Formal Should Your Risk Management Be?
  13. Part Four: Risk from the Investor's Viewpoint
    1. CHAPTER 13: NAV/Return Reporting
      1. Lack of Documentation
      2. Inefficiencies
      3. Incomplete Reporting
      4. Lack of Precision
      5. Misleading Measures
      6. Masking Risk
      7. Dressing Up Returns
    2. CHAPTER 14: Constructing a Portfolio of Funds
      1. Integrating Asset Allocation, Manager Selection, and Portfolio Construction
    3. CHAPTER 15: Risk Due Diligence
      1. Analyzing Previous Portfolios
      2. Determining Transparency and Risk Culture
    4. CHAPTER 16: Transparency
      1. Changing Investor Requirements
      2. The Political Environment
      3. The Pros and Cons of Position Disclosure
      4. Current Practices
  14. Part Five: The Solution
    1. CHAPTER 17: Industry Standard Solution
      1. Reporting Standards—A Common Language
      2. The Case for Standardization
    2. CHAPTER 18: The Risk Fundamentals ® Solution
      1. Overview of the Service
      2. Interpreting Risk Management Reporting
    3. CHAPTER 19:   
  15. Appendix: Integrating Market Correlation into Risk-Adjusted Return
  16. APPENDIX: Integrating Market Correlation into Risk-Adjusted Return
  17. Glossary
  18. Index
  20. About Bloomberg
  21. About the Author