Investors who are new to risk hedge funds may be astonished to know that risk management is the basis of most funds. Hedge funds aim to stay away from or limit drawdown periods and to confine outperformance when conditions are most suitable. Every portfolio holds risk. Risk can be of great benefit to the portfolios, as well as responsible for losses. By the use of derivates and hedge funds, this risk can be minimized to some extend and prevent losses in several circumstances by keeping the upside exposure. Investing in some type of hedge funds can be riskier than putting money in a regulated fund. Hedge funds always have some of these characteristics: leverage, short selling, lack of transparency and regulation, short volatility, and appetite for risk. The hedge fund which has an appetite for risk is always risk hedge funds.
This year has been a testing period for hedge funds. To date, hedge funds are outperforming the equity markets. All together, hedge funds pulled in a mopping $11.3 billion in this August, which is a six month high. This shows that the fund managers are ready to risk hedge funds, since their hunger for risk has increased in these months. Because of the vibrant character of hedge fund investment policies and the brunt of fund flows on leverage and performance, risk hedge funds models need more classy analytics and users.
The major significant message in terms of risk hedge funds management arrives from the inappropriate name of this kind of unconventional investment: the notion that diversification of systematic risks are not relevant here, with the hedge fund returns, actually, representing a blend of advanced management of market incompetence and mindful revelation to some specific organized risks. Maximum return is what matters to the fund managers and investors in risk hedge funds and not the performance of hedge funds, like in other form of funds. Moreover, the sufficient evaluation in terms of risk management exposure shifts from the area of excess risk to a complete and total risk approach.
Various studies suggests that, there is a need for more refined analysis of hedge fund returns, especially nonlinear risk models has to be developed for the different types of securities that hedge fund trades. The general aspects which serve as a starting point for making a quantitative model for risk hedge funds exposures are: price factors, sectors, investment styles, volatilities, credit, liquidity, macroeconomic factors, sentiment, and nonlinear interactions. But some degree of customization is necessary in these aspects in order to develop a better risk hedge funds quantitative model.