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Risk Management for Hedge Funds: Introduction and Overview

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

June 7, 2001

Although risk management has been a well-ploughed field in financial modeling for over two decades, traditional risk management tools such as mean-variance analysis, beta, and Value-at-Risk do not capture many of the risk exposures of hedge-fund investments. In this article, I review several aspects of risk management that are unique to hedge funds - survivorship bias, dynamic risk analytics, liquidity, and nonlinearities - and provide examples that illustrate their potential importance to hedge-fund managers and investors. I propose a research agenda for developing a new set of risk analytics specifically designed for hedge-fund investments, with the ultimate goal of creating risk transparency while, at the same time, protecting the proprietary nature of hedge-fund investment strategies.

Number of Pages in PDF File: 36

Keywords: Risk management, hedge funds, risk transparency, risk budgeting, fund of funds

JEL Classification: G10, G12, G23, G24

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Date posted: September 13, 2001  

Suggested Citation

Lo, Andrew W., Risk Management for Hedge Funds: Introduction and Overview (June 7, 2001). Available at SSRN: http://ssrn.com/abstract=283308 or http://dx.doi.org/10.2139/ssrn.283308

Contact Information

Andrew W. Lo (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
100 Main Street
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)
HOME PAGE: http://web.mit.edu/alo/www
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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Citations:  65
Footnotes:  27

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