This report examines the key risk issues in the hedge funds and derivatives space, and outlines the latest qualitative and quantitative methods through which risk management can become more strategic
The 'Hedge Funds & Derivatives Risk 2015' special report comprises seven separate articles listed below, these can be read individually or as a sequence.
One aspect to operational risk, which can have a meaningful impact on performance, not to mention the integrity of the manager, is valuations. According to Deutsche Bank's Global Prime Finance group's third annual Operational Due Diligence Survey, asset valuation is in sharp focus for 38 per cent of investors surveyed. Unilaterally, respondents said they would review a fund's valuation policy during their ODD review whilst 78 per cent stated they would verify the valuation procedure during the on-site review.
Risk managers are making a more conscious effort to not only understand the virtues, but also the limitations, to risk models as they adjust to life under greater regulatory scrutiny, in particular the AIFM Directive in Europe.
Operational Due Diligence (ODD) has become increasingly important across the alternative investment industry and more resources and attention are being placed on this function. This was one of the main findings from a session on ODD at the recent Global Alternative Investment Management (GAIM) Ops Conference in the Cayman Islands.
By Chris Kundro, Wells Fargo Global Fund Services – There are many professionals, both internal and external to a fund manager, who play an important role in controlling a fund's operational infrastructure and mitigating a fund's operational risk. COOs, CFOs, and CCOs manage the functions necessary to support a hedge fund, while fund directors, auditors, and operational risk analysts ensure that a hedge fund's infrastructure is sound and secure.
Managing derivatives risk in the portfolio is a demanding task at the best of times. But as global regulators make inroads to drive transparency in OTC markets, managers find themselves having to file detailed risk positions under CFTC regulations in the US, EMIR reporting in Europe, not to mention the unnecessarily dense Annex IV report under AIFMD.
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The markets have experienced significant volatility in the last few months. China's decision to devalue its currency, the collapse of commodity prices and the uncertainty caused by global quantitative easing have all caused significant disruption to financial markets. In August, all three major equity indices in the US suffered their biggest losses since 2011.