OPPapers.com

Hudge Fund Threat

Threats: Several possible threats exists the hedge fund. The first possible threat would be market risk and operation risk. The highly increased economic leverage will raise a risk to the hedge fund. The high potential risk may result in a great loss in the highly unpredictable market. Furthermore, the use of a classic performance measurement will cause a threat to the hedge fund. Regulation is important for preventing fraud and the agency costs.
Market risk and operational risk are two primary sources of the hedge fund. Market risk is the first sources a function of portfolio, liquidity, leverage, and counterparty risk. Another risk is operation risk, meaning the interaction of people, process, system, and data. Since these risks get increased, the hedge fund has faced a potential loss.
According to the Wall Street Journal in August 2008, the largest European hedge-fund, SRM Global Master Fund was recorded for the 85% loss of its value since its launch in September 2006. Although the founder of this largest fund, Mr. Jon Wood has a record that shown he has never lost money for the 16 years, there is no evidence to proof that the return of the hedge fund can be expected and protected. While the hedge funds are targeting the high risk investment, in other word, the loss may be higher than the other low risk investments. Also, since the investors are depending on these founders to perform their own fund during the locked period, the investors have no way to stop their unpredictable losses.
A performance measurement is very important for calculating the return of the hedge fund. Otherwise, it will become a threat to the hedge fund and causes it to lose attractiveness. People would like to use a classic performance measurement for calculating autocorrelation, bias and fat tails, which become isolation. A true evaluation of hedge fund performance requires consideration of the combinative effects of autocorrelation, bias and fat tails.
Hedge funds lacks liquidity...