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Hedge Fund Risk Management: Investor Concerns - Management Summary
Evelyn Cronin

May 2003

This report focuses on hedge fund investors concerns with risk. It examines: who the respondents are, how much money they represent, how they select hedge funds, what their perceptions of the risk are, what disclosures they require, how they measure risk and performance and why they'd exit a fund.

  • 86 investors responded from over 15 countries, most of whom managed over $100M of assets
  • The respondents have $25B of assets in hedge funds in 2002, equating to about 5% of the total hedge fund capital worldwide

Respondents expressed their opinion on the importance of twenty-nine different risks, with the top five shown in Table 1.1.

Table 1.1 Top Five Risk (N=86)

Rank Risk
1 Volatility
2 Personnel
3 Leverage
4 Fraud
5 Accounting
Source: Ecronin, July 2002

  • The backdrop of fluctuating markets, and accounting irregularities at publicly traded firms are affecting investors - volatility and accounting risk are in the top five.
  • Fraud is seen as an ever-present danger to investors in this loosely regulated world
  • Leverage is perceived as a key risk to investors, and as a vital disclosure requirement. Its measure is viewed as one of the key hedge fund risk measurements.
  • The experience of the managers is a key reason for investors to select a fund. Once invested, though, personnel risk is perceived as hugely important to investors and a change in management is a key reason for investors to exit a fund.
  • Most respondents do not use an investment advisor and/or manager to pick hedge funds, they usually select the funds themselves
  • Investors believe that the manager's experience and the funds performance are the most important criteria when selecting a fund, and a change in either may cause investors to consider exiting a fund
  • Investors used a variety of methods to diversify their hedge fund portfolios, but the fund of hedge fund route was the most popular.
  • Leverage ratio and liquidity measure are the key risk measures
  • The relative importance of risks and risk measures varied quite considerable, particularly so for large investors, small investors and those who diversify by fund of fund approach when compared to the overall average.

For a full copy of this thesis please contact Evelyn Cronin at Eurekahedge on

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