Key Concepts

1. One can define four categories of quantitative hedge fund strategies: statistical arbitrage, quantitative equity market-neutral, long/short equity, and the 130/30 strategy.

2. Most hedge funds rely on leverage to boost market performance. During August 2007 many hedge fund managers who were faced with severe and rapid declines in market values, had to de-leverage.

3. The events of August 2007 could be explained by declining fixed-income arbitrage strategies and hence market values, which provoked a call for sudden liquidation by traders. The subsequent market reversal suggests that the adjustment was liquidity based.

4. Over the past ten years the network perspective shows an increased connectedness. This increased connectedness can be linked to (at least) two key factors. Over the years hedge funds have an increased exposure to traditional market factors. The ties due to intricate strategies and multi-strategy funds have increased the correlations.

5. The major impact varying strategies have on liquidity risk is governed by the types of contracts traded by the hedge fund. Funds that use more exchange traded securities will be marked-to-market more readily and receive frequent margin calls.

6. Managers will need to modify and improve risk-management protocols so as to try to prevent another similar catastrophe.

7. ■ The post August 2007 event findings suggest that systematic risk is present in hedge funds and supports the idea of a hedge fund beta.

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