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

CHAPTER 5

Measuring Risk

This chapter and the following one focus on two interrelated but significantly different processes. This chapter focuses on measuring risk, that is, quantifying the aggregate amount of risk in the portfolio. The next chapter focuses on understanding the source of this risk. I first review the risk management practices of the sell-side, which are significantly more advanced than those of the buy-side, to learn from their experience. Sell-side risk management organizations focus on measuring risk by employing a common reporting framework across the diverse asset classes they hold. (The trading desks use specific tools to understand the unique risks of their specific asset class.) Although monitoring risk is an important ...