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Alternative Market Briefing

Other Voices: The truth about hedge fund risk

Friday, December 16, 2011

This article was authored by Charles T. Hage. Mr. Hage is currently Compliance Officer at U.S.-based firm Mohican Financial Management, LLC. During his career he has reviewed financial performance measures in alternative investments and managed financial risk in corporate investment programs.

Need for Truth

The hedge fund industry is seriously short on how it treats the subject of risk. Especially in times when challenging economic and financial conditions call for high standards of professionalism to achieve success, the industry should be fine-tuning all its mechanisms. Instead, in the core subject of portfolio risk, the hedge fund industry clings to misconceptions, is less than honest with itself, and misleads investors. The industry should rethink the role of risk in the hierarchy of investment decisions, embrace universally valid measures of hedge fund performance, and inject responsibility into the system for screening hedge funds.

This paper is intended to explain why and how we need to rethink risk, and to suggest that if we do, the result can be to allocate capital to hedge funds more productively and profitably.

Before proceeding, note that GIPS (Global Investment Performance Standards) are designed to fairly represent and fully disclose to investors the performance information of a firm in aggregate. GIPS is concerned with how to value assets and calculate returns in all accounts managed by the firm, to ens......................

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