Managing Hedge Fund Risk and Financing: Adapting to a New Era

Hedge fund Monitoring

When the target allocation has been determined and the investor allocates capital to the chosen hedge funds, the work is by no means done. From this point on, it is essential to monitor the investment to ensure that it meets expectations. The managers in the portfolio must be continually evaluated to determine if they remain the best choices. Do they still meet the investor's minimum acceptable return and risk standards? Do they have peers that are now performing better in one or more categories? Are the managers still doing what they were hired to do? In comparison to their peers, are these investments still the best the investor can do? The investor, his advisor, or fund of funds manager will typically visit the manager every few months to ensure that the provisions of the investment agreement are still followed. Between regular visits to the office, the investor has to rely on reported fund returns to determine if the fund is following the agreed guidelines. These then need to be combined to evaluate whether the fund of funds portfolio is acting as expected.

In general, it is a good idea to run a full quantitative analysis on the invested funds at least monthly. This enables tracking of the evolution of hedge fund factors, confirmation that expected correlations continue to be realized and rolling volatility remains within expectations, monitoring of downside risk and the ongoing risk analysis of the combined portfolio. In addition, it is advisable to have ...