Standardizing Risk Assessments for Hedge Funds

FREMNT, CA: The hedge fund management success is often driven by a great deal of investment in research and development and the need to protect the investment. Investors need transparent and secure ways to invest a significant amount in hedge funds. Managers want opaqueness in some critical respects. So, it is necessary to create a standard data starting from broker till the investor. As part of the screening, the fund administrators have to standardize the risk assessment units.

Investors are also anxious about the exposure reports typically received by their managers for quite a few good reasons such as Low granularity, the use of non-standard units, the use of questionable reporting practices, lack of independent verification or monitoring. One of the main benefits of the hedge fund is that it can reduce risk and diversification in every portfolio.

Hedge fund managers are usually criticized for the reason that they do not disclose specifics about their operation or risks even to their own investors for legal purposes. In addition, positions often have proprietary, external knowledge of positions that can directly affect expected returns. However many investors do not have the tools that measure the risk positions, so the best way is not to disclose these risk positions. So in order to realize the risks that are affecting the investments, the standardized risk information needs to be disclosed to the investors. It has proven beneficial to apply return-based style analysis, but its results have to be understood clearly. Sometimes it is agreed that the loading of the factor corresponds to the effective distribution of the fund's portfolio alongside the other asset classes.

Preqin, one of the best U.K-based financial data and information providing company predicts that the hedge fund industry is growing fast at CAGR of 31 percent, and by 2023, is expected to reach the market value of $4.7 trillion. However, the hedge fund capital is dominated by North America, by 2023; Europe and Asia-Pacific investors are expected to reach a capital share of 64 percent and 59 percent respectively.