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

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Conclusion

In this chapter, we defined the primary hedge fund strategies, discussed their differences and similarities, and developed a framework for categorizing them based on their unique characteristics. We also presented an integrated risk management model which defined in detail the risk types present in various hedge fund strategies, and presented a menu of basic strategies for analyzing, measuring and controlling each of those risks.

What follows in the next chapter is a discussion of the relative prioritization of risks within each hedge fund strategy as a function of their frequency of occurrence and ability to generate losses. We then review the statistical properties of hedge fund returns by strategy through the credit crisis of 2008. Together, this information can be used to establish a bespoke risk management strategy for a specific hedge fund based on its primary risks, its performance in the credit crisis, and given its strategy and unique operational set up.

Endnotes

1. “Directionality” means the extent to which the fund seeks to profit from the direction of the market overall. Equity Long short managers, for example, tend to be long biased and profit when the market rises, while convertible arbitrage funds are often fully hedged, have no directionality, and are indifferent to the direction of the market.

2. The IMF uses a flexible classification system for determining a country's “development” which considers (1) per-capita income level, (2) export diversification ...

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