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Hedge Fund Risk Fundamentals: Solving the Risk Management and Transparency Challenge by Ramon Koss, Richard Horwitz

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CHAPTER 6

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 ...

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