Fund Considerations

81.6: Discuss risk management and liquidity considerations for a fund of hedge funds manager.

Hedge fund risk management refers to the monitoring of the risk activities of individual hedge fund managers. Some examples of excessive risk include exceeding leverage limits, triggering stop losses, and drifting from prespecified investment style. The fund of funds manager should implement a process to establish and monitor all excessive risk limits in an attempt to minimize the occurrence of excessive risk events. The manager also must monitor broad market conditions for potential liquidity and credit crises.

Liquidity considerations are especially important. During times of financial crises, lenders may make borrowing more difficult, which in turn may force the fund to sell assets prematurely in a falling market.

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