Science and software combine to take the danger out of hedge funds, but are they making managers too conservative
In the hedge fund industry, 'risk' is not always a four-letter word. As Capital Market Risk Advisors, a New York-based financial advisory firm, noted in a white paper, "Risk itself is not bad. What is bad is mispriced, mismanaged or unintended risk."
That said, several factors have come together over the past five years to push the related issues of risk identification, measurement and management to the fore. These include increased volatility in the world's capital markets, the growing complexity of hedge fund strategies and the rapid growth of the industry itself.
Spectacular hedge fund debacles like the near collapse of Long-Term Credit Management in 1998 coupled with periodic reports of other hedge fund blow-ups and fraud, such as the Manhattan Fund in 2000 and most recently the Eifuku fund in Japan,...