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From Precy Dumlao, Opalesque Asia:
Hedge funds have been taking a fresh round of demonization lately. But while the industry has all the reason to be concerned with a new regime of tighter regulations, a study made by Olympia Capital Management shows that managers – especially FoHFs managers – could benefit if they took a risk regime-based approach in managing their portfolios.
In its latest study entitled: “Dynamic Alpha: Risk Regime-based Portfolio Management,” Olympia Capital, a global manager of diversified and thematic fund of funds, said a risk regime-based approach would allow fund managers to determine arbitrage opportunities such as volatility, price dispersion, short- or long-term trends, and financing costs for their portfolios.
Olympia Risk Indicator
Olympia has developed the Olympia Risk Indicator or ORI to measure the amount of risk at any given time. Three risk regimes are defined according to the value of the indicator: Low risk regime, where risk appetite is high, volatility levels low and risk premiums reduced; High risk regime, corresponding to periods of financial stress with a sharp rise in risk premiums, correlation and financing costs; and Intermediate risk regime, corresponding to normal market conditions.
The study noted that regardless of which index is used, the absolute returns generated by hedge funds are clearly linked to the risk regime identified by ORI. On average, hedge funds deliver a monthly perfor...................... To view our full article Click here
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