Risk management in hedge funds

Thesis (M.Com. (Economics))--North-West University, Potchefstroom Campus, 2005.Investing in hedge funds has become very popular in recent years. Previously, their main focus was on the high net-worth investors. These individuals perform their own risk management and they are, according to law, allowed to invest in any asset or product they desire, whilst ordinary citizens and institutions cannot. The focus is now changing as more pension funds are exploring new ways to invest. Hedge funds are realizing this and are currently adapting to accommodate the institutional investors, and they now have to adjust to more regular reporting and more strenuous risk management. This move of hedge funds to institutional investors also requires more risk management to convince the regulators to allow more investors. Regulators still have the event of Long Term Capital Management (a hedge fund that collapsed in 1998, and caused a worldwide market collapse) on their minds. Very strict risk management is required to convince the regulators that pension funds may invest more money in these more sophisticated investment vehicles. Regulators exist to protect the ordinary citizen against optimistic marketing by institutions that will essentially gamble with the not-so-sophisticated investor's money i.e. the man in the street. In this new era of hedge funds, more and better risk management is needed and it is the aim of this dissertation to address these issues. In particular, an improved measure of exponentially weighted moving average volatility, a detailed analysis and solution of the differential scaling in time of risk and return and an empirically-tested enhancement of the incorporation of endogenous liquidity risk into value at risk are presented.Master