Understanding the Source of Risk

A variety of approaches are used by the traditional buy-side to quantify and explain the source of risk:

  • “Slicing and dicing” or “bucketing”
  • Index-based benchmarks
  • Value at Risk (VaR)
  • Risk-factor framework

The first three do not represent statistically significant tools to understand the risks inherent in hedge funds. However, the fourth tool, a risk-factor framework, can simultaneously provide both a holistic approach to measuring risk and a fundamental understanding of the source of risk. Furthermore, as is discussed in later chapters, such an approach provides an additive framework that can permit risk transparency on a structural level without requiring the disclosure of specific holdings.

Slicing ...

Get Hedge Fund Risk Fundamentals: Solving the Risk Management and Transparency Challenge now with the O’Reilly learning platform.

O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.