Risk Management for Hedge Funds: Introduction and Overview

Posted: 31 Jul 2001  

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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Abstract

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.

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

JEL Classification: G10, G12, G23, G24

Suggested Citation

Lo, Andrew W., Risk Management for Hedge Funds: Introduction and Overview. Financial Analysts Journal, Vol. 57, No. 6, November/December 2001. Available at SSRN: https://ssrn.com/abstract=275153

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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