Risk Management for Hedge Funds: Introduction and Overview
Andrew W. Lo
Massachusetts Institute of Technology (MIT) - Sloan School of Management; Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL); 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
Date posted: September 13, 2001
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