7

Hedge Fund Market Risk Management

We have encountered throughout this book the problems associated with the risk that the value of a hedge fund will decrease due to the impact of various market factors, such as changes in interest and foreign currency rates. Moreover, with the heightened publicity surrounding recent financial events, hedge fund managers have come under increased pressure from investors and regulators to efficiently manage, monitor, measure and report such market risks inherent in their investment strategies. Indeed, experience has clearly shown that the measurement and management of extreme market conditions is of paramount importance for hedge funds.

This chapter provides an introduction to market risk management for hedge funds and presents the fundamentals of quantitative risk measures and models used in the industry today. The chapter also covers some of the more advanced risk measures available that can more effectively manage risk in light of the limitations encountered with traditional market risk measures.