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Managing Hedge Fund Risk and Financing: Adapting to a New Era by DAVID P. BELMONT, CFA

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Minimum Integrated Risk management Capabilities

The essential objective of investment risk management in a hedge fund is to skew expected returns positively by maximizing potential upside and minimizing potential downside. Minimizing the volatility of returns is not necessarily the appropriate objective as this can lead to diversifying away all potential sources of excess return. Structuring positions to take intended risks and rewarded risks, while avoiding unintended risks, is key to creating a return distribution with positive skew.

Integrated Risk Framework

It is insufficient to simply have risk systems, risk analysis and risk reports. Risk management is about optimizing risk and return, and not just about academic risk analysis. Risk analysis alone is useless unless the information provided is integrated into the investment and portfolio management decision-making process. To embed risk analysis and risk management in an organization, a risk management framework needs to be implemented. The components of an effective risk management framework are set out in Figure 2.1:

Figure 2.1 An effective risk management framework

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Data: Data is a vital force in most financial institutions today. Without accurate, timely, and complete data, most financial institutions would be unable to survive. In the case of a hedge fund, the necessary data for investment risk analysis includes complete ...

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