Fund of Funds Risk Management
It is no secret that 2008 was one of Wall Street’s toughest years and perhaps the most challenging year ever for hedge funds. Evidence of this can be found in the dismal performance of the Barclay’s Hedge Fund and Fund of Funds indices, both down almost 21%. Many funds blew up, including Sailfish, Peloton and others. As the year closed, serious allegations of fraud were levied against one of the most famous and respected hedge fund managers, Bernard Madoff. While it is too early to count all of the casualties, the preliminary numbers paint a rather bleak picture. Using Barclay’s Global Data Feeder database, we estimate that about 18% of hedge funds either shut down or stopped reporting performance. Experts agree that the number of funds that go out of business will continue to increase throughout 2009. The widespread fallout from 2008 will provide firms that managed to survive with many learning opportunities, including the importance of proper risk management.
Effective risk management requires that firms establish the culture, policies and procedures that are specific to their operating model. Funds of funds, family offices and other hedge fund investors share a common need for a strong risk measurement infrastructure. Though there is no single blueprint for building a strong risk management process, there is one common need: accurate risk measurement.