Quantifying hedge fund default risk

By their very nature hedge funds allow the investor to be exposed to different risk factors such as volatility, counterparty or liquidity risk. Exposure to these risk factors is not only a source of superior risk-return trade-off but also the very essence of hedge funds' extensive diversification possibilities compared with traditional investments.1,2

More importantly the exposure to these risk factors is also a diversifiable risk, as it has been demonstrated that hedge funds exhibit low correlat