Does Risk Management Work?

Abstract:     
Although there has been substantial growth in the use of formal risk management systems, there is minimal empirical evidence of their benefits. To evaluate the effectiveness of risk management, we investigate the methods that hedge funds use to manage risk and their performance outcomes. Consistent with risk management practices reducing left-tail risk, funds in our sample that use formal models performed significantly better in the extreme down months of 2008. We find no evidence that having a dedicated head of risk management is associated with reduced left-tail risk. Funds employing VaR had more accurate expectations of how they would perform in a short-term equity bear market.

Number of Pages in PDF File: 51

Keywords: hedge funds, risk management, expectations, performance

working papers series