Hedge fund cowboys failing to manage risk | FT Alphaville

Hedge fund cowboys failing to manage risk

Hedge funds should make pretty good risk managers, given that risk management is their job, says Felix Salmon at RGE Monitor. But a new report from Deloitte Research shows that hedge funds are doing little to buck their Wild Wild West, devil-may-care image.

Half of all hedge funds don’t measure the amount of leverage they have embedded in assets such as forwards and derivatives, the report said. Further, 54 per cent of all hedge funds either don’t track liquidity or, of those that do, neglect to do stress-testing and correlation-testing.

And while approximately 80 per cent of the funds polled had written a risk management policy, only about 60 per cent of those actually shared that policy with their investors. Deloitte’s report also criticised the “lack of sufficient breadth and detail” in existing policies, noting that “at a minimum, a written risk management policy should include acceptable levels of risk, how risk exposures will be identified, and how risks will be mitigated.”

Even funds’ directors were in the dark about risk – 20 per cent of funds polled did not share information on their risk management policies with their boards of directors, the report said.