Assessing Hedge Fund Risk in a New Era of Hedge Fund Transparency

Traditional risk management of hedge funds is often complicated by their lack of transparency. Consequently, plan sponsors traditionally rely on returns analysis to manage the risk of a portfolio of hedge funds. Such an approach involves some obvious difficulties, for example, returns data is often available only on a monthly basis and sometimes with a lag. In addition, some hedge funds have short histories or may have different fund managers over time. One compromise solution is for hedge funds to reveal their positions to a third party, such as a risk vendor, which in turn generate risk statistics and reports for the plan sponsor without revealing those positions. Risk management in this context is based on holdings rather than historical returns, and this new approach is shown to be able to bypass the difficulties involved in the traditional approach.